OpenAI Has a Warning for Nvidia. Is the AI Bubble Bursting?

It hasn't even been two years since OpenAI changed the world by launching ChatGPT, but already there are signs that the technology could be hitting a ceiling.

OpenAI's latest model, Orion, was designed to replace GPT and be a significant step beyond it, but the model has not hit the company's performance targets. While it's an improvement on OpenAI's GPT models, it's not the leap that the company had hoped it would be, and evidence is now piling up that artificial general intelligence (AGI) might be further away than technologists like OpenAI CEO Sam Altman had hoped.

After all, OpenAI isn't the only AI start-up experiencing such challenges. According to Bloomberg, the latest version of Alphabet's Gemini isn't meeting internal expectations, and Anthropic, which is seen as the AI start-up most closely challenging OpenAI, is behind on the release of its updated Claude chatbot model called 3.5 Opus.

Image source: Getty Images.

Is the AI bubble popping?

The biggest reason why these models seem to be reaching a ceiling is that they are having trouble finding new sources of substantial training data, as earlier models have exhausted resources like Wikipedia, social media, and news sites. Margaret Mitchell, the chief ethics scientist of AI start-up Hugging Face, told Bloomberg about the technological challenges: "The AGI bubble is bursting a little bit."

In other words, until the problem of securing reliable training data sets is addressed, the anticipated performance of advanced AI models will likely fizzle out, at least in the near term.

It's unclear how significant this slowdown is right now, but at a time when other industry insiders have called out an AI bubble, the news could reel in inflated stock valuations across the tech sector.

With the law of diminishing returns seemingly hitting the large language models (LLMs), the AI sector could take a hit, and Nvidia (NASDAQ: NVDA) seems to be the most at risk here.

After all, Nvidia's graphics processing units (GPUs) are used to train AI models like ChatGPT, and demand for those components has skyrocketed since the launch of ChatGPT. Cloud-infrastructure companies, autonomous-vehicle companies like Tesla, and AI start-ups have stocked up on Nvidia's chips in anticipation of an AI boom.

However, there's still no "killer app" in generative AI, and the rap on the technology seems to be that it is impressive and capable, but the use cases aren't fully clear, especially when it is still prone to mistakes.

Some Wall Street analysts have expressed skepticism that the billions that companies like Alphabet and Microsoft are spending on capital expenditures are going to pay off, as end-user spending on generative AI still seems to be underwhelming.

David Cahn, a general partner at the venture capital firm Sequoia Capital, called out the inflating AI bubble back in June, saying that the revenue expectations implied by the AI build-out were on track to reach $600 billion by the end of this year, while OpenAI, the leader in the sector, is on track to reach just $3.7 billion in revenue this year. It's targeting $11.6 billion in 2025.

What it means for Nvidia and its AI peers

Nvidia stock has shrugged off the news thus far, indicating investors don't see it as a threat, and the AI stock now trades near all-time highs. The slowdown in gains in LLMs doesn't mean it's the end of the technology advancing. OpenAI's Orion model is currently undergoing post-training, a routine procedure that's designed to tweak the tone of the model and adjust it before it's released to the public, which is expected to happen early next year.

There are also other ways to advance AI besides LLMs, though it has been the preferred approach for big tech companies in the two years since ChatGPT launched.

Nvidia is set to report third-quarter earnings on Wednesday, and we could hear some questions about the challenges with AI model scaling and the possible implications for Nvidia.

Analysts expect Nvidia to report another blowout round of results, with the consensus calling for 82% revenue growth to $32.9 billion. For now, the company's soaring growth doesn't seem to be in trouble, but if AGI is further out than investors anticipated, the stock is likely to feel the impact at some point.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 875% — a market-crushing outperformance compared to 172% for the S&P 500.*

They just revealed what they believe are the 10 best stocks for investors to buy right now…

See the 10 stocks »

*Stock Advisor returns as of November 11, 2024

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Microsoft, Nvidia, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.