The past several weeks have been challenging ones for the overall market. But they’ve been downright miserable ones for most artificial intelligence (AI) stocks. Microsoft shares are down more than 20% from last year’s peak, for instance, while Broadcom is off by more than 10%. Oracle (NYSE: ORCL) shares have been cut in half on concerns of ramped-up AI infrastructure spending that may or may not pay off.
What gives? Simply put, investors have gotten a wake-up call about AI’s cost, and value. It’s not living up to the hype. The technology’s leading tickers are being repriced to reflect this reality.
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But don’t give up on the AI revolution just yet. You should be viewing this lull as a long-term buying opportunity, in fact. This headwind is just the next predictable stage of a psychological cycle that most investors have seen over and over again.
The particular stage that AI is in right now — called the “trough of disillusionment” — reliably precedes a recovery that’s bullish for most of any industry’s top stocks.
Technology market research and consulting company Gartner recognized and formalized what’s now commonly known as the Gartner Hype Cycle. It consists of five stages that most new technologies put their underlying companies though (along with their stocks). The five sequential stages from beginning to end are:
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Innovation Trigger: A new technology is developed, and it works, even if there’s no clear marketable use for it.
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Peak of Inflated Expectations: The need for the technology in question starts becoming clear, generating a great deal of excitement — and investment.
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Trough of Disillusionment: As it turns out, while the tech has its place, there’s obviously less immediate opportunity than the initial hype implied. Some related companies start to falter.
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Slope of Enlightenment: The cost of the tech comes down, its functionality and purpose grow, and the remaining companies start turning it into a practical, marketable business.
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Plateau of Productivity: The industry stabilizes as the underlying technology becomes commonplace. Unprofitable players have bowed out, leaving the viable ones in place.
And whether they realize it or not, veteran investors have seen this cycle play out many, many times. Virtual reality, solar panels, voice-over-internet protocol (VoiP), 3D printers, and speech recognition are just some of the technologies that were all the rage in their infancy. Then the hype cooled when reality set in. Now, all of these are quietly the basis of viable businesses.
