The Sell-off Has Begun – Is the Technology Stock Bubble About to Burst?

Palantir down 12 percent, Meta down 4.8 percent, Microsoft down 2.9 percent, Nvidia down 2.8 percent – such are the losses that the most popular American technology stocks have brought to their owners in just the last three trading days on Wall Street. The current weakening of the technology sector – which has been a part of the stock market that has brought enormous profits to (long-term) investors over the past few years – has reignited the debate over whether the ‘bubble is about to burst’. This mini correction, which has reduced the Nasdaq index by 2.5 percent to 21,172 points in the last week, has most significantly impacted Palantir’s stock, a software company with extensive business for U.S. intelligence and security agencies.

Palantir’s stock has been declining for six consecutive days, resulting in its fall from the group of the 20 most valuable American companies. According to analysts from Wall Street quoted by CNBC, there is no clear reason for the (current) slight decline in the value of the technology sector, and the negative sentiment towards Palantir’s stock could partly be attributed to the announcement by Andrew Left, head of Citro Research, a company that profits from short selling stocks. Recently, Left identified Palantir as a stock that is completely detached from business fundamentals, meaning it is significantly overvalued.

Huge Investments

However, the current negative sentiment among investors has also been partly fueled by comments from Sam Altman, the head of OpenAI, the creator of ChatGPT. This chatbot has played a central role in the expansion of the artificial intelligence sector since 2022, and Altman now believes that it is increasingly appropriate to speak of an ‘AI bubble’. According to American journalists, Altman mentioned the word ‘bubble’ three times during a recent informal meeting with the media, emphasizing that the artificial intelligence sector is currently in a phase where investors are overly optimistic about its further potential. However, this does not mean that the application of artificial intelligence has reached its ceiling.

– Is artificial intelligence the most important thing that has happened in a very long time? My answer is yes – added Altman. In any case, the largest companies in this sector are ready to invest even more money. Microsoft has announced capital investments of $120 billion, Amazon will invest $100 billion, Alphabet $85 billion, and Meta $72 billion.

Dan Ives, an analyst at Wedbush known for his optimistic views on the technology sector, highlighted during an appearance on CNBC that the demand for artificial intelligence infrastructure has increased by between 30 and 40 percent in the last few months. In his opinion, the second wave of the AI revolution is just beginning, which is the arrival of autonomous vehicles. Ives therefore believes that the rise in stock prices across the entire technology sector will last at least another two to three years.

Healthy Cooling

Technology stocks performed excellently during the summer. Compared to the beginning of April when the entire market collapsed significantly after the announcement of ‘reciprocal tariffs’ by President Donald Trump’s administration, the Nasdaq index has strengthened by almost 40 percent to date. Individually, some technology stocks are now worth as much as 80 percent more compared to their April lows. Therefore, this multi-day sell-off should primarily be viewed in the context of profit-taking and a ‘healthy’ cooling of a market that has surged sharply in a short period.

When discussing the valuations of technology companies, a parallel is often drawn with the internet ‘dot.com’ bubble of the early 2000s, whose burst wiped out a number of then-promising companies. However, the problem was that those companies were only promising, emphasizes some analysts who believe that the current situation bears no resemblance to the dot.com bubble. – Back then, you didn’t have companies that were making money. Now we are talking about companies that have very solid profits, very strong cash flow, and finance a good part of their growth from that cash flow. In many respects, the situation today is different from then – emphasized Rob Rowe, an analyst at Ciit bank.

It seems there is no bubble. Technology stocks are simply too expensive.