As the hype around AI shows few signs of slowing, one analyst has identified several warning signs that a correction could be on the way. In a research note entitled, “Magic Money Tree,” Richard Windsor, veteran tech stock analyst and founder of research firm Radio Free Mobile, warned that money was flowing into the AI sector, “with very little attention being paid to company fundamentals in a sure sign that when the music stops there will not be many chairs available.” He outlined three recent events that give him cause for concern: Cohere valuation The first is that generative AI company Cohere is reportedly on track to raise funds at a $5 billion valuation. That’s almost double its value in June last year when the startup raised $270 million at a $2.2 billion valuation. Windsor described this as “the latest sign of … reckless abandonment.” “Cohere will now be worth $5bn even though the annual run rate of its revenue in 2023 was just $13m,” he said in the note on Mar. 28. He said the compay’s “valuation equates to a historic price/sales ratio of 384x which indicates that investors have another bad case of FOMO (fear of missing out) and are rushing into anything that can be remotely associated with AI.” The company’s President Martin Kon recently told CNBC that Cohere — backed by Nvidia and started by ex-Google AI researchers — is betting on generative AI for enterprise use, rather than on chatbots. Inflection AI deal Windsor, who for 11 years covered the global tech sector at Nomura Securities before starting his own firm, raised another “red flag”: Microsoft’s apparent deal with Inflection AI. “Another red flag was Microsoft’s ability to hire the CEO and 70 staff from the AI start-up Inflection AI,” he said. “Things were not going well at Inflection AI because if the company had been doing very well, Microsoft’s advances would have been swiftly rebuffed.” In what’s been described as an ” unusual deal ,” tech giant Microsoft has reportedly agreed to pay Inflection AI around $650 million in cash, enabling it to hire the startup’s staff and use its technology. Amazon investment Emphasizing the “FOMO effect” around AI, Windsor noted that even tech giant Amazon isn’t immune. “Amazon has thrown another $2.75bn of its total $4bn commitment at Anthropic, and I am pretty certain that Amazon will end up acquiring the company,” he said. Amazon’s largest-ever investment will see it continue to pump money into the generative AI start-up, which has a chatbot Claude that competes with OpenAI ‘s ChatGPT. Stocks to buy if ‘forced’ “The frenzy continues but it is one I am perfectly comfortable staying well away from,” Windsor said of the AI sector currently. If “forced” to get into the space, Windsor said he would buy Nvidia, noting that the U.S. chipmaking giant has been the main beneficiary of the AI hype to date. The stock is up around 80% year-to-date and 240% over the last 12 months. “Nvidia is really the only company that is making tangible profits from the current boom in interest in investment in generative AI but when there is a correction, there will be nowhere for Nvidia to escape, although I suspect that it will be hurt much less than many others,” he said. He added that he already owns chip stock Qualcomm , which is in a “very good position to benefit as generative AI starts to be implemented at the edge.” — CNBC’s Kate Rooney contributed to this report.
