A prominent business professor has issued a stark warning about the artificial intelligence sector, comparing the current AI investment bubble to the size of Jupiter and predicting catastrophic consequences when it bursts. Erik Gordon, an entrepreneurship professor at the University of Michigan’s Ross School of Business, told Business Insider that rampant speculation and massive overinvestment in AI have created an unprecedented financial threat.
The warning comes as Microsoft stock tumbled more than 6% following its earnings report on Wednesday, despite beating expectations. By Thursday at 12:30 p.m. ET, shares were trading approximately 12% lower, marking one of the sharpest intraday declines in the company’s history. Gordon attributes this dramatic drop to Microsoft’s enormous AI investments, calling it “a warning of the burst to come.”
The numbers behind the AI spending spree are staggering. Microsoft’s net cash used in investing surged 95% year-on-year to over $57 billion in the six months ending December, primarily driven by $49 billion in property and equipment additions, including data centers necessary for AI infrastructure. Prior to the post-earnings slump, Microsoft’s shares had roughly doubled since early 2023, pushing the company’s market value above $3.5 trillion.
Other AI-related stocks have experienced even more dramatic gains. Nvidia, the chipmaker at the heart of the AI revolution, has seen its shares vault 13-fold, reaching a market valuation close to $4.7 trillion—more than 20 times its projected revenue. Palantir, the data-analysis company, has jumped approximately 25-fold, achieving a $375 billion market value, or roughly 85 times its forecasted 2025 revenue.
Gordon warns that when the bubble bursts, “the debris will be everywhere,” affecting both large institutional investors and individual investors betting on continued growth. He previously characterized this as an “order-of-magnitude overvaluation bubble” and predicted the suffering would be “more painful” than the aftermath of the dot-com crash.
However, Gordon doesn’t expect an immediate collapse. He told Business Insider that investors still have sufficient cash to “prop it up” for several months, and ongoing technological advances remain “exciting enough to distract” from irrational valuations. Despite his warnings, AI stocks have largely continued their upward trajectory.
Key Quotes
The AI bubble is almost as big as the planet Jupiter. When it bursts, the debris will be everywhere.
Erik Gordon, entrepreneurship professor at the University of Michigan’s Ross School of Business, used this dramatic metaphor to describe the scale of AI overinvestment and warn about the widespread impact when the bubble eventually bursts, affecting both institutional and individual investors.
Big, institutional investors will be hit with it, and so will individual investors who bet the bubble would get even bigger.
Gordon emphasized that the fallout from an AI bubble burst would be indiscriminate, affecting sophisticated institutional investors and retail investors alike, suggesting no one would be immune from the financial consequences.
Microsoft’s shares sank because of the truckloads of cash it is investing in AI. That is a warning of the burst to come.
Gordon pointed to Microsoft’s dramatic stock decline following earnings as an early warning signal, suggesting that investors are beginning to question whether massive AI infrastructure spending will generate adequate returns.
Our Take
Gordon’s warning deserves serious consideration, particularly given the historical parallels to previous technology bubbles. The valuation metrics are objectively extreme—companies trading at 20-85 times revenue cannot be justified by traditional financial analysis. However, the counterargument is that AI represents a genuinely transformative technology that could justify current investments over time. The key question is timing: will AI applications generate sufficient revenue before investor patience runs out? Microsoft’s stock reaction suggests the market is becoming more discriminating about AI spending. The real risk isn’t necessarily that AI won’t deliver value, but that expectations have run so far ahead of reality that a painful correction becomes inevitable. Investors should carefully evaluate whether individual AI stocks reflect sustainable business models or speculative excess.
Why This Matters
This warning from a respected business professor highlights growing concerns about AI market valuations and the sustainability of current investment levels. The comparison to the dot-com bubble is particularly significant, as that crash wiped out trillions in market value and took years for recovery. The massive capital expenditures by tech giants like Microsoft—$57 billion in six months—represent an unprecedented bet on AI’s future profitability.
The market’s reaction to Microsoft’s earnings, despite strong results, suggests investors are becoming increasingly nervous about AI spending without clear returns on investment. This could signal a broader shift in sentiment toward AI stocks. For businesses, this raises questions about the pace and scale of AI adoption. For workers and society, a potential AI bubble burst could slow innovation and deployment of AI technologies. The extreme valuations—Palantir trading at 85 times revenue—indicate speculation has potentially detached from fundamental business metrics, creating systemic risk across the technology sector and broader markets.
Related Stories
- Meta Q4 Earnings: Zuckerberg Bets Big on AI with $135B Capex Plan
- Meta and Nvidia Billionaires’ Wealth Soars $152B in AI Boom
- Groq Investor Warns of Data Center Crisis Threatening AI Industry
- Microsoft’s Satya Nadella on OpenAI Partnership: Competition and Collaboration
- CEOs Express Insecurity About AI Strategy and Implementation