Oil Above $100 a Barrel For First Time Since 2022. Here’s Why Artificial Intelligence (AI) Investors Should Care.
Nvidia (NASDAQ: NVDA) is the poster child of the artificial intelligence (AI) industry. Its chips are the “brains” that make the AI work. However, AI does not live in a vacuum. With oil and natural gas prices rising, investors may need to start worrying about the future of AI companies like Nvidia. Here is the reason.
The geopolitical conflict in the Middle East has caused major supply disruptions. The headline issue is oil, but natural gas, chemicals, and even fertilizer markets have also had an impact. When supply is restricted in the commodity market, prices tend to rise.
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At first glance, this should not affect the stock of artificial intelligence. To some extent, that is true, as the use of AI is likely to continue to grow even amid high energy costs. However, higher costs will increase throughout the economy. For example, Nvidia cannot make its chips without energy, and natural gas is used to generate energy. It may find its production costs go up as a result. That’s one small example in what is a huge AI ecosystem.
Reliable and affordable power is also a major bottleneck for companies building and deploying AI-powered data centers. As electricity prices rise, it will likely become more expensive to build and operate an AI infrastructure, changing the technology’s cost-benefit analysis. That said, costs are likely to rise across the economy, too.
Fertilizer costs have also increased significantly, which may lead to an increase in food prices. Consumers are already tightening their budgets, so higher costs of fuel, electricity, and food could easily push the US economy into recession. If that spreads across the world, AI can run into a very large wall.
There are estimates that as much as $700 billion could be spent on building AI by 2026. That is a large sum of money, but all such large investments depend on the belief that there will be a satisfactory return. Large investment projects, such as building data centers, building factories, and even investing in new technologies (such as AI), tend to be cyclical. During economic downturns, the use of such facilities is often delayed or canceled.
Certainly, the sky is not falling. The demand and use of artificial intelligence will continue to grow even in extreme situations. The real problem for investors is that Wall Street has too much good news for many of the leading AI stocks. Nvidia’s price-to-earnings ratio is 36x, the highest on the whole scale and beyond. S&P 500 (SNPINDEX: ^GSPC) P/E ratio of 27x. Nvidia’s IP/E is actually on the low side compared to other stocks viewed as AI investments, such as. Silicon Labs (NASDAQ: SLAB)sporting a P/E of more than 200x based on 2025 adjusted earnings.
There are also many AI companies that have yet to make a sustainable profit, such as SoundHound AI (NASDAQ: SOUN). While the stock has lost two-thirds of its value, investors may continue to sell if AI adoption begins to slow.
AI is as important a technology as the Internet was at the turn of the century. But, like the Internet, not all companies will ultimately succeed, and even those that do may find that investors won’t continue to support high valuations forever. It may be too early to say whether rising oil prices will burst the AI bubble, but AI investors shouldn’t underestimate the potential for that to happen, given the history of bubbles on Wall Street.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Nvidia and SoundHound AI. The Motley Fool has a policy of disclosure.
Oil Above $100 a Barrel For First Time Since 2022. Here’s Why Artificial Intelligence (AI) Investors Should Care. was originally published by The Motley Fool
