Investors should approach AI companies with caution, says Patricof, as valuations soar and companies rush into the space.
Investors should approach AI companies with caution, says Patricof, as valuations soar and companies rush into the space.
The tech rally witnessed this year can be primarily attributed to the wider adoption of artificial intelligence (AI) and the potential it holds for companies in this space. However, veteran venture capitalist Alan Patricof, who invested early in successful stocks like Apple, is sounding a note of caution regarding the growing AI hype.
Patricof, founder of venture capital firm Alan Patricof Associates, believes investors should approach AI companies with caution. He noted that an “awful lot” of companies are rushing into the AI space, with valuations often reaching into the billions.
However, Patricof advises a longer-term perspective: “But let’s tune in 12 or 24 months from now — those companies are spending a lot of money so they may come back to the market to raise money,” he stated in an interview with the New York Post.
Patricof also highlighted the rush of companies entering the AI arena: “Everyone wants to be associated with an AI company; it’s the latest trend. But the best approach to AI is to invest in a company that has effectively incorporated AI as a tool, rather than just buying into an AI platform,” he added.
His comments may be not way off as even obscure companies with very vague linkage to AI have seen valuations shoot up. Nvidia Corp. (NASDAQ:NVDA) has emerged as a credible AI play, while some investors even question the credibility of Palantir Technologies, Inc. (NYSE:PLTR) as an AI play.
Patricof also commented on the current investment landscape. He noted that until recently, the investment climate was more manageable than the situations during the 2008 financial crisis and the 2000 dot-com bubble burst.
Patricof described the 2000 bubble burst as particularly severe, leading to a sudden crash followed by several challenging years. In contrast, the 2008 crisis was driven by external factors.
Regarding the current scenario, Patricof attributed it more to the excessive valuations observed in 2021 and 2022.
“Most firms have had to bite the bullet in the last quarter and accept the reality that new companies — and follow on later stage investments — just weren’t worth the overall market climate and interest rate environment,” he added.
