AI Bubble About to Burst? Boom or Crash Next in 2026

Key Concepts

• AI Bubble: Concerns about inflated valuations in AI-related stocks and the potential for a market correction.
• Picks and Shovels Strategy: Investing in companies that support the AI industry (infrastructure providers) rather than directly in AI companies.
• Dividend Growth Investing: A strategy focused on companies with a history of consistently increasing dividend payouts.
• Valuation Metrics: Utilizing metrics like Price-to-Earnings (P/E), Price-to-Cash Flow (P/CF), and Price-to-Book (P/B) to assess stock value.
• Contrarian Investing: A strategy of investing against prevailing market sentiment, often focusing on stocks disliked by analysts.
• Defensive Stocks: Investments that are expected to perform relatively well during economic downturns.
• Moat: A company's sustainable competitive advantage.

AI Stocks: Bull vs. Bear Case & Dividend Strategy – A Detailed Summary

Introduction

The discussion centers around the current state of AI stocks, addressing concerns about a potential bubble and outlining investment strategies for both optimistic ("bull") and pessimistic ("bear") scenarios. The conversation highlights the importance of considering both direct AI investments and supporting infrastructure, alongside a dividend-focused approach for stability.

I. The AI Bubble Debate & Valuation Concerns

Mark Likenfeld argues that bubbles typically burst after widespread optimism, not during periods of concern. He notes that current anxieties about an AI bubble are not necessarily indicative of an imminent crash. However, he acknowledges that valuations are significantly stretched.

• Palantir: Trading at 250x earnings and 225x cash flow.
• Nvidia: Trading at 55x cash flow.
• Key Point: High valuations don’t cause bubbles to burst, but they exacerbate the impact when they do. People don’t typically sell simply because a stock is expensive; they continue buying until sentiment shifts dramatically.

II. Investment Strategy: The "Picks and Shovels" Approach (Bull Case)

Likenfeld advocates for investing in the infrastructure that supports the AI boom, rather than directly in AI companies themselves. This "picks and shovels" strategy aims to capitalize on the increased demand for resources powering AI development.

• Black Hills Corp. (BKH): Recommended as a key pick. This electric and natural gas utility services customers in Wyoming, a growing hub for data centers due to cheap land and electricity.
  • Growth Potential: Expected 5-7% earnings growth excluding data center business. Acquisition of Northwestern Energy will add 800,000 customers.
  • Dividend: Solid dividend yield of approximately 3.8%, with a history of annual increases since 1971.
  • Key Customers: Microsoft and Meta are among its customers, demonstrating tangible demand.
  • Rationale: Data centers require massive amounts of energy, and Black Hills is positioned to benefit from this demand. The company’s existing growth trajectory is enhanced by the data center boom.

III. Defensive Strategy: Hedging Against an AI Bubble (Bear Case)

For investors concerned about a potential AI bubble burst, Likenfeld suggests a defensive investment in companies providing essential goods and services, regardless of the AI landscape.

• Nutrien (NTR): A Canadian potash company, recommended as a defensive play.
  • Essential Industry: Potash is a crucial fertilizer component, and demand is driven by the need to feed a growing global population.
  • Market Position: Holds approximately 20% market share, providing pricing power.
  • Tariff Resilience: Demonstrated ability to pass on tariff costs to customers.
  • Financials: Trading at 13x forward earnings, 1.2x book value, and 7x cash flow (generally considered a bargain if under 10x cash flow).
  • Dividend: Yield of 3.5%, with annual dividend increases since 2018.
  • Analyst Sentiment: Half of Wall Street analysts rate the stock as a hold or sell, which Likenfeld views as a positive sign, suggesting the market is late to recognize its value.

IV. Contrarian Investing & Analyst Ratings

Likenfeld emphasizes a contrarian investment approach, favoring stocks that are undervalued or overlooked by Wall Street analysts. He believes analysts often lag behind market trends and issue buy ratings after a stock has already begun to rise. He actively seeks out stocks with "hold" or "sell" ratings, viewing them as potential opportunities.

V. Dividend Growth Investing: A Long-Term Strategy

Likenfeld is a strong proponent of dividend growth investing, emphasizing the benefits of owning companies that consistently increase their dividend payouts.

• Compounding Effect: Regular dividend increases enhance buying power over time, mitigating the impact of inflation.
• Downside Protection: Dividends provide a buffer during market downturns, reducing the need to sell holdings.
• Total Return Enhancement: Dividends contribute to overall investment returns, especially over the long term.
• Free Resource: Likenfeld offers a free report detailing 12 dividend stocks his team favors, outlining his strategy for identifying companies with strong dividend growth potential.

VI. Logical Connections & Synthesis

The conversation flows logically from assessing the AI market’s current state to proposing investment strategies tailored to different risk tolerances. The "picks and shovels" approach is presented as a bullish play, while Nutrien serves as a defensive hedge. The emphasis on dividend growth investing provides a unifying theme, offering a long-term strategy applicable to both scenarios. The discussion highlights the importance of independent research and contrarian thinking, challenging conventional investment wisdom.

VII. Notable Quote

“I always like the stocks that Wall Street analysts don't because they are very very often late to the party.” – Mark Likenfeld.

Conclusion

The key takeaway is that navigating the AI landscape requires a nuanced approach. While AI presents significant growth opportunities, investors should also consider defensive strategies and prioritize companies with strong fundamentals, sustainable competitive advantages, and a commitment to returning value to shareholders through consistent dividend growth. The conversation encourages investors to think beyond the hype and focus on long-term value creation.