What are the risks of investing in AI stocks
Artificial Intelligence (AI) is the buzzword in international markets and for a reason. From autonomous vehicles to chatbots taking up customer service, AI is part of businesses that vary from unstructured agency businesses to highly regulated ones like banks. Investors have been investing in AI stocks, betting on the next big wave. But while AI is the future, investing in AI firms has risks.
Warren Buffet once stated: “Risk comes from not knowing what you’re doing.” AI stocks, though promising, are not exempt from problems such as fast-paced evolution, overvaluation and uncertainty in regulation. As an investor, you should be cautious, and the best place to begin is by comprehending the determinants that would lead to a decline in stock prices of AI stocks. Continue reading to find out more about investing in AI stocks risks.
Market volatility and unpredictable fluctuations
AI stocks are among the market’s most volatile. Prices go up one day and plummet the next. Why? The AI sector is changing quickly, and investors overreact to every news item.
Consider the example of OpenAI and Microsoft. When ChatGPT was introduced in November 2022, Microsoft’s share price jumped due to its strong collaboration with OpenAI. But when Google’s competing models, such as Gemini and other rising Chinese companies, such as DeepSeek, picked up pace, Microsoft’s AI dominance came under a sudden doubt.
This sort of volatility is typical for emerging technologies. Investors gamble on potential rather than established business models. A single success or failure can send market attitudes swing wildly. For long-term investors, this introduces uncertainty.
Overvaluation and bubble worries
Companies heavily invested in AI are more highly valued on possibilities in the future than achievements today. Look at Nvidia. The firm leads in AI chip production, and its stock price justifiably reflects this leadership. However, the valuation of the company has risen above what conventional financials would justify. If AI expansion decelerates or competition increases, Nvidia’s stock may see steep corrections as it did in late January 2025, dropping nearly 20% in a matter of days after DeepSeek released a potentially revolutionary LLM.
The concern is that AI stocks could be in the process of creating a bubble. If money rushes in without appreciation for business fundamentals, prices may be driven to levels that are unsustainable. When reality catches up, stocks can crash. The dot-com bubble is an example to consider—several businesses promised the moon, however, only a few of them succeeded in surviving beyond a few years.
Regulatory risks
In India, the government has initiated discussions on AI regulations with an emphasis on the ethical use of AI, data protection, and accountability. If strict laws materialise (as they probably will), AI firms will have to grapple with compliance issues and added expenses. Such rules restrict the use of AI, impacting revenue streams and stock prices.
China has ruled heavily on AI already. Businesses such as Alibaba and Baidu, having invested billions of dollars in AI, are now subject to strict government regulations. Similar developments have been observed in Europe, where the EU’s AI Act has already created risk evaluation and transparency criteria, with the US preparing to catch up federally as states such as California and Tennessee have already launched state-level regulations.
Profitability issues and uncertain business models
Most AI companies remain loss-making, spending ever-increasing sums of money on building new models, recruiting expensive talent, and supporting costly computing resources. For instance, OpenAI’s ChatGPT has millions of users, but according to CNBC, the company is projected to lose Rs. 43300 crores in FY2024, rising to Rs. 1,20,000 crores in losses by FY2026. Many AI startups follow a similar pattern—growing fast but struggling with monetisation.
Investors must watch out for companies that claim to grow but don’t have a clear-cut strategy to be profitable. Merely because a firm is a front-runner in AI research does not necessarily mean that it will trickle down to solid earnings.
Over-reliance on large technology and constrained competition
The AI market is now dominated by a small group of giants—Microsoft, IBM, Alphabet, Apple, Amazon, and Nvidia. These businesses possess the computing power, human capital, and funds to dominate the AI market while smaller AI startups tend to develop applications based on technology owned by these businesses, depending on them for cloud computing resources, funding, or partnerships.
If big tech firms change their strategies, it can hurt smaller AI companies. For instance, if Microsoft decided to prioritise its own AI models over OpenAI’s, OpenAI’s valuation could take a hit. This dependence on a few large firms makes AI investing risky. If regulations or competition weaken big tech’s control, the entire AI investment landscape could shift.
Geopolitical and supply chain risks
The development of AI relies on having access to high-powered hardware, specifically AI chips. The market is currently dominated by Nvidia and AMD, but chip fabrication is Taiwan-dependent. With China-Taiwan geopolitical tensions in place, an interruption in the supply of chips could affect AI firms globally.
Also, US-China tensions around AI technology have created export bans on advanced chips. AI firms that depend on Chinese hardware or markets are at risk from these trade restrictions. For Indian investors, such risks are paramount. If chip production for AI is disrupted, AI firms that are dependent upon such chips may suffer. Stock prices can be influenced by global politics just as easily as business performance.
Conclusion
AI tools have become widely used across a range of businesses including NBFCs and online marketplaces. Delivering on their promises of efficiency, scalability and cost reduction, businesses that create these tools are poised for explosive growth. However, AI technology is rapidly evolving, the competition is fierce, and regulations are tightening all over the world. AI stocks potentially promise high returns, but also carry significant risks. For investors, the AI race presents opportunities and uncertainties. It is important to understand the factors that act as investment risks before putting down any money, as understanding these risks will help you make more calculated investment decisions.