A top economist is challenging the way investors think about the AI boom. Torsten Slok, Chief Economist at Apollo, warns that the math behind AI profits simply does not add up. In a blog post published on Friday, Slok argued that profits in the AI sector are currently being funded by investors rather than earned from customers.
AI Profit Margins Are Inverted, Says Apollo Economist
Slok's analysis breaks down the AI value chain into four categories, including models and applications, and cloud and compute. His central finding is striking: the parts of the AI value chain with the highest profit margins—companies making AI models and applications—actually have the lowest levels of profitability.
According to Fortune, this is a departure from the standard business model of business, in which profit margins are higher for companies selling an end product to consumers.
Why the AI Bubble Could Become Real
The economist's warning goes beyond simple skepticism about AI hype. Slok suggests that the success of the technology in one area of the economy could make the bubble real in another, more precisely. In other words, the current market may not have accounted for how the AI boom is actually paying off.
"Profits are currently being funded by investors rather than earned from customers." — Torsten Slok via Fortune
This dynamic creates a fragile foundation. If investors stop pouring money into AI ventures, the profitability of these companies could quickly evaporate, since it is not being generated by real customer demand.
What This Means for the Equities Market
Slok's analysis suggests that the equities market has not fully priced in this risk. The AI boom is paying off, but not in a way that the current equities market has accounted for. Investors may be betting on future customer revenue that has not yet materialized.
- AI model and application makers show high margins on paper but low real profitability.
- Cloud and compute providers may be capturing more actual earnings from customers.
- The disconnect between margins and profitability could signal an overvalued market.
Our Take: Investors Should Question the AI Math
To put it plainly, Slok is pointing at a serious flaw in how the market values AI companies. When profits come from investors rather than customers, the entire business model is on shaky ground. This is not just a technical detail for economists—it affects anyone with money in the stock market.
In our view, the warning is timely. The AI sector has attracted enormous investment, but the fundamentals need to catch up with the hype. If customer revenue does not replace investor funding, the bubble Slok describes could become very real. Investors should pay close attention to whether AI companies can actually earn money from the people using their products, not just from the people funding their growth.
The question is no longer whether there is an AI bubble. The question is whether the market is ready for the math to stop working.
