Analysts warn about profitability of artificial intelligence investments

The excitement surrounding artificial intelligence (AI) has driven significant investments, but analysts are now scrutinizing the actual profitability of these ventures more closely. Last week, the Nasdaq Composite experienced a notable decline, its largest weekly drop since late June, partly fueled by concerns related to the AI sector, as reported by CNBC.

This caution becomes more apparent as growth expectations meet reality. Research firm Gartner issued a clear warning: up to $3.5 trillion in AI investments could be at risk due to profitability issues among leading AI models. John Lovelock, Gartner's chief forecaster, explained to CNBC that returns are not yet supporting the current scale of investment.

Too Much Capacity, Too Little Profitable Demand?

One of the key points Lovelock highlighted is a timing mismatch: there is currently more compute capacity than demand that generates profit. Many AI solutions, including tokens and processing power, are offered for free (freemium), complicating monetization. This could lead to the AI market consolidating into a duopoly, with mergers and acquisitions among AI-dedicated cloud companies, known as 'neoclouds'.

CoreWeave's situation exemplifies these tensions. The company saw its shares fall more than 25% last week, its largest weekly drop since November 2025, due to debt concerns. Corporate bond market investors have started to shun CoreWeave, with its credit default swaps reaching distress levels, according to CNBC. Ron Albahary, chief investment officer at LNW, believes these moves in CoreWeave's spreads signal a change in the narrative that AI is insulated from rising interest rates.

Mixed Signals from Big Players

While some analysts are raising red flags, major tech companies continue to bet heavily on AI. Apple, for instance, unveiled its HomeView smart home hub, powered by Apple Intelligence with Siri AI, a device designed for multiple household users that uses facial recognition to display relevant information. Meta Platforms also saw its shares climb after rolling out its Muse Wonder AI model. You can read more about these developments in this article.

However, even figures from established AI companies are raising questions. Anthropic's third-quarter revenue, totaling $16.8 billion (up from $11.6 billion in the second quarter), raised flags among investors about the pace of AI build-out growth, according to sources cited by CNBC. Investors are becoming more selective, looking for companies that can demonstrate a return on capital to justify their debt. Previously, the assumption was that all AI investments would pay off, but that perspective is shifting.

Why it matters

The artificial intelligence market is transitioning from a phase of euphoria to one of greater scrutiny. Investors are no longer taking for granted that every AI investment will be profitable. Companies in the sector will need to demonstrate solid business models and a clear ability to generate returns, which could reshape the AI landscape in the coming months, potentially leading to a concentration of power in fewer hands.