Investing

Is There an AI Bubble? And Will it Burst in 2025?

Joey Frenette

Published: January 30, 2025 8:42 am

With stock valuations climbing steadily over the past two years and artificial intelligence (AI) budgets of the big tech firms climbing by the year, it’s only prudent to wonder if a bubble is in the works. Undoubtedly, you’ve probably heard someone refer to the AI boom as a bubble that could end as violently as it did in the early 2000s.

While I wouldn’t use the phrase bubble to describe the state of AI, I do see pockets of froth that are in the process of being wiped out. Though painful, I do view such a correction as fear-driven and really nothing that should have investors running to the hills.

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China’s DeepSeek AI causes U.S. tech stocks to tumble

With China’s DeepSeek AI model, rolling out, causing the U.S. stock market to roll over in the process, it seems like a deliberate high-ROI (return on investment) AI strategy could be the one that reigns supreme. In a prior piece, I noted the likelihood that 2025 would see the AI race steer toward greater efficiency gains.

Undoubtedly, the new DeepSeek, which was trained at a fraction of the cost (reportedly 98% cheaper) of OpenAI’s o1, is being referred to as a “Sputnik moment” for AI. Indeed, it seems to be a “killer app” that may level out the playing field for firms that don’t have the ability (or willingness) to spend billions of dollars to pull a bit ahead in this rapid AI race.

Is AI headed for a year of efficiency?

With DeepSeek proving what’s possible with limited resources, it seems like the “year of efficiency” for AI has finally been kicked off. It will be interesting to see how much more efficient and capable AI models will be in the future. Either way, I believe that a new slate of AI winners and losers will be minted as some of the laggards, unknowns, and unsung heroes in the AI race begin to step forward.

Whether Monday’s vicious sell-off in tech and semiconductors is the start of a bursting of the AI bubble remains to be seen. Personally, I don’t see a widespread AI bubble like the one that burst back in 2000. As such, the DeepSeek dive in tech stocks seems to be more of an overreaction and an opportunity for contrarians to buy more than anything.

For the most part, the AI hype has been concentrated in a handful of names, most notably within the semiconductor scene. Undoubtedly, Nvidia (NASDAQ:NVDA), Broadcom (NASDAQ:AVGO), and other fast-rising data center stars blew up in spectacular fashion on Monday. It’s these sorts of names (think the stocks that have gained triple-digits in the past few years) that may be viewed as most vulnerable in a correction.

Apple stock gains on a big down day for tech

Even if the S&P 500 sank on Monday, many names, including shares of Apple (NASDAQ:AAPL), gained significantly on the day. This goes to show that the market doesn’t necessarily have to crater just because a few semiconductor and data center names are leading the downward charge. As they say, the stock market is a market of stocks.

Either way, I view the DeepSeek R1 sell-off as less of an AI bubble burster and more of a spark for a very healthy correction in the most overheated corners of the AI scene. While I don’t know how long this recent AI-concentrated sell-off will last and how deep it will go, I do think it’s healthier for the longevity of the AI bull market.

A new slate of winners, perhaps Apple, which has been more efficiency-focused and “slow and steady” with its AI strategy, could rise up, while the fast-flyers go into a tailspin of sorts as investors digest what the new chapter of the AI boom brings. Also, questions linger as to how DeepSeek and other highly-efficient models could play a role in the boom as OpenAI begins to lose some of the first-mover advantage it once had. 

The bottom line

In short, I don’t see a broad AI bubble—just a few of the pricier AI stocks being oversold in a panic. That said, I would get ready for increased volatility and a new slate of market leaders as the DeepSeek breakthrough nudges investors to pay closer attention to ROI, efficiencies, and AI strategies that aim to win the long game.