Is Artificial Intelligence worth the hype?

AI chatbots are fun, sometimes even useful, and, until recently, endowed with the uncanny ability to mesmerize investors and fuel the U.S. stock market.

However, the excellent performance of a new, relatively cheap artificial intelligence engine from a Chinese startup, DeepSeek, has perturbed the market and complicated the AI story.

Investors are reevaluating prominent companies swept up in AI fever, including Nvidia, Meta, Alphabet, Microsoft, Amazon, Tesla, and the private startup OpenAI. The notion that full-blown superhuman intelligence is imminent has spurred the-sky-is-the-limit valuations, as well as concerns about the political and social risks posed by advanced intelligence.

One immediate question: Is the main approach to developing AI in the United States — pouring billions of dollars into chips and infrastructure — worth the expenditure for all companies if similar results can be achieved far more cheaply? DeepSeek’s lower-cost innovations add urgency to bigger, long-standing financial questions: How much are AI companies worth, and what will the broader economic value of AI ultimately be?

Daron Acemoglu, a winner of the 2024 Nobel in Economic Science, gave me some answers. “There is a lot of hype in the industry,” he said in a telephone conversation. Yes, he said, AI companies have made some “impressive achievements,” but he added that many financial and economic calculations are based on mere “projections into the future that are sometimes exaggerated.”

Acemoglu, an economist at the Massachusetts Institute of Technology with an interest in the effect of technical innovations on global economics, is skeptical about the more fervent AI claims. He ranks AI as a significant advance, perhaps with a macroeconomic effect akin to the telephone, which was no small thing.

But don’t get carried away, he said, at least not yet. He doubts that full, advanced artificial general intelligence “that can do anything a human can do but more” will be achieved. Therefore, over the next decade, he estimated, increased productivity from the diffusion of impressive, but limited, AI engines will increase the size of the U.S. economy by only about 1%, or roughly 0.1% a year.

That doesn’t seem like enough to count as a technological revolution in economic terms, I said.

“Well, it’s not trivial,” Acemoglu said, “but it’s one or two orders of magnitude less” than AI bulls “would like you to hear.” Of course, he added, if one or more companies achieve true, complete, artificial general intelligence within the next several years, then his estimates will turn out to be far too low.

Relentlessly Upbeat

It’s earnings season on Wall Street, and in the past two weeks, some of the U.S. companies that are developing and investing heavily in AI have offered entirely positive — and, frankly, self-serving — estimates of the AI future.

I read transcripts and listened to several conversations with top executives and analysts. The most extravagant narrative undoubtedly came from Tesla CEO Elon Musk, who took time off from his government work to talk about his company’s earnings.

While conceding that Tesla will have a tough year meeting production and profit targets, he was ecstatic about its AI prospects. Already, Musk claimed, “there is no company in the world that is as good at real-world AI as Tesla.” Once its cars are approved for “full self-driving” on the roads — he promised that he wasn’t “crying wolf” and that it would really happen this year, though he has been saying the same thing for many years — the company’s fleet will increase in value “10X,” he said, thanks to AI.

Moreover, he said, Tesla will produce millions of AI-embedded Optimus robots in the not-too-distant future, creating a “path for Tesla being the most valuable company in the world by far.” Musk elaborated: “There is a path where Tesla is worth more than the next top five companies combined.” And “that is overwhelmingly due to autonomous vehicles and autonomous humanoid robots.”

Musk’s assertions are not universally accepted. Since Jan. 24, when DeepSeek’s AI innovation began to roil the market, Tesla shares have fallen 11%.

Other AI companies fared nearly as badly.

Shares of Nvidia, whose chips run much-advanced AI, have dropped 9%. Aswath Damodaran, a New York University finance professor who has evaluated many tech companies, said DeepSeek’s efficiency implied that fewer and less advanced chips would be needed for many AI functions. As a result, he wrote recently, the market for Nvidia’s high-end chips isn’t likely to grow as rapidly as expected. So, he said, Nvidia shares will be worth less than anticipated, even after the recent price decline.

In addition, shares of nuclear-powered electricity providers like the utilities Constellation and Vistra, which had soared in the expectation that AI data factories would need ever-increasing quantities of power, sank on reduced projections of the required electricity.

Meta, Alphabet, and Microsoft, which have invested billions in AI development, have had mixed performances since DeepSeek’s arrival. Alphabet and Microsoft have fallen, while Meta has risen 11%.

The companies are complex and enormous, with different products and strategies, but the chiefs of all three said they would continue pouring vast sums into AI infrastructure, in hopes of developing a competitive edge, while extending AI offerings throughout their consumer services. This past week Alphabet said it would increase capital expenditures to $75 billion in 2025 from $52.5 billion last year — a huge AI-driven jump that surprised Wall Street and that, along with a slump in Alphabet’s cloud-computing sales, may account for the decline of its shares.

Military Supremacy

One company making heavy use of AI whose shares have surged this month is Palantir. It’s not a consumer brand, but its technology is widely used not just by corporations but by the U.S. military, police forces and U.S. Immigration and Customs Enforcement. These have been growth areas in Democratic and Republican administrations.

Shyam Sankar, the company’s chief technology officer, told analysts that DeepSeek had made basic AI cheaper but that “I think the real lesson, a more profound one, is that we are at war with China. We are in an AI arms race.”

Alexander Karp, the company’s CEO and one of its founders spoke unabashedly of Palantir’s role in ensuring U.S. military supremacy. “We believe we are making America more lethal, making our adversaries increasingly afraid of acting against the interest of America and especially Americans,” he said.

Karp and Musk were the two highest-paid executives of U.S. public corporations in 2023, according to filings with the Securities and Exchange Commission that for the first time required universal disclosure of “compensation paid.” Musk gained $1.4 billion in 2023, while Karp had a windfall of nearly $1.1 billion, the filings showed. Both of their fortunes continue to be tied to AI and, in idiosyncratic ways, to the U.S. government.

AI companies come in many shapes and sizes and will need to be valued in tiers, Damodaran said. Consumer-facing companies embedding AI chatbots in services available to millions will benefit from lower-cost, commoditized AI, while cutting-edge AI with military, corporate, and scientific payoffs may receive premium valuations. Infrastructure companies like Nvidia can benefit from these variations and more, but not all ventures will require huge expenditures on the most formidable chips.

Given the complexity and uncertainty, it makes sense for long-term investors to diversify while AI fever cools down, Acemoglu said.

“I have a balanced portfolio,” he said. “So I’ve got tech stocks, health stocks, real estate stocks, everything. I don’t go out of my way to pick, you know, Tesla or any other company. I’m an index fund kind of guy, and I don’t do anything other than that.”

This article originally appeared in The New York Times.