The Wall Street Journal reported Thursday that the frenzy surrounding AI-related stocks has reached a point where straightforward statistical analysis suggests the vast majority of investors chasing the theme are likely to underperform. The assessment comes from a report titled “Bayes and Base Rates” by Morgan Stanley Investment Management’s Michael Mauboussin and Dan Callahan, which applies base-rate reasoning — using historical frequencies to judge the likelihood of rare events — to the AI sector.
OpenAI last year projected its revenue would climb to $145 billion by 2029, a compound annual growth rate of 108% over five years, the Journal reported, citing the company’s projections. The Morgan Stanley analysts examined a database of nearly 19,000 large companies and found that no firm had ever achieved such sustained growth. They acknowledged that base rates “can change as the world changes,” but noted that the current projections are extreme even by the standards of previous transformative technologies, including the internet and railroads, according to the Journal.
The report comes amid growing anxiety in the AI sector. A possible price war between OpenAI and rival Anthropic has compounded concerns that the companies will struggle to turn a profit. The Dow Jones Industrial Average on Wednesday suffered its worst single-day decline of the year, and several AI-related stocks, including Super Micro Computer, fell sharply.
Mauboussin and Callahan are not alone in their skepticism. Asset manager GMO noted late last year that a larger share of the U.S. stock market was trading above 10 times trailing revenue than at the peak of the dot-com bubble in 2000, the Journal reported. GMO previously found that investors who bought stocks above that multiple would have ended up with 80% less money than an S&P 500 index fund over 40 years, after accounting for inflation.
Upcoming initial public offerings highlight the valuation extremes. SpaceX, whose IPO is eagerly anticipated, has priced its shares at 92 times sales, according to the Journal.
Some AI-related shares rebounded in premarket trading Thursday after two days of losses. Super Micro Computer rose after falling 28% on Wednesday following its announcement of a $7 billion equity offering to fund AI server capacity. Micron Technology, Broadcom, Advanced Micro Devices, and Marvell Technology also advanced. Oracle shares fell premarket after the company reported higher-than-expected capital expenditures for data centers, the Journal reported.