Alphabet (GOOGL) CEO Sundar Pichai has added his voice to the growing number of leaders warning about potential overinvestment in artificial intelligence. This trend has already caused a selloff in some AI-related stocks. Pichai stated that the search company isn’t “immune” if the AI trend turns out to be a bubble.
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He expanded on this cautious view in a BBC interview, saying: “When we go through these investment cycles, there are moments we overshoot as an industry. There are elements of irrationality.” When asked how badly Alphabet would be affected if an AI bubble bursts, Pichai confirmed that “no company is going to be immune.”
Stock Defies Selloff after Receiving Warren Buffett’s Endorsement
Despite the CEO’s gloomy outlook on the industry, Alphabet stock outperformed rivals during the general technology selloff, rising 1.1% in early trading on Tuesday. This positive movement built on a 3.1% gain from the previous day after it was revealed that Warren Buffett’s Berkshire Hathaway (BRK.B) had invested in Alphabet during the previous quarter.
Being chosen as the “bargain stock” in the AI trade by the famed long-term investor seems to be giving Alphabet shareholders a sense of safety, isolating it from the immediate tech downturn that is hitting peers like Amazon (AMZN), Meta (META), and Microsoft (MSFT).
Massive Spending on AI Creates Cash Flow Concerns
The concern about a potential bubble is tied directly to how much cash big tech companies are pouring into AI infrastructure. According to Goldman Sachs (GS), large technology companies such as Google, Amazon, Meta, and Microsoft are now using around 95% of their operating cash flows on capital projects (like data centers), stock buybacks, and dividends. This is a significant jump from 80% in 2019, with the main reason being the huge increase in capital expenditure (capex) dedicated to AI.
Investor Worry about Overinvestment Reaches a 20-Year High
Pichai’s warning reflects a spreading concern among professional money managers. A Bank of America (BAC) global fund manager survey showed that worries about AI overinvestment are growing. For the first time since August 2005, out of the investors surveyed, a net 20% believe that companies are overinvesting. The survey explicitly stated that this jump is “driven by concerns over the magnitude and financing of the AI capex boom.”
Analysts at Rothschild & Co. Redburn have also recently downgraded Microsoft and Amazon, arguing that the financial returns from generative AI might not be as great as people assume. Despite the warnings, Pichai continues to compare AI’s importance to the invention of the internet and calls for more investment in energy infrastructure to support the technology.
Is Google a Buy, Hold, or Sell?
Turning to TipRanks, Alphabet’s shares currently enjoy a Strong Buy consensus rating based on 30 Buys and seven Holds issued by analysts over the past three months.
Moreover, at $312.50, the average 12-month GOOGL price target indicates about 10.6% upside from the current trading level.
