In the 1990s, any company with “dot-com” attached to its name could issue stock, share prices would soar, and millionaires would be made in the company and in the equity market.
At the end of the century, it all came crashing down when company after company failed to deliver the life-changing products or services it had set out to create.
Trillions in market valuation were lost when the dot-com bubble became the dot-com bust.
Forty-three companies with valuations of at least $5 billion each saw their share prices plunge an average of 80 percent in the wipeout. They included market darlings such as Amazon, Cisco, and Microsoft.
No wonder market-watchers today fret that the current frenzy to invest in anything related to artificial intelligence can end in a similar crash.
AI chip-maker Nvidia recently traded at 40 times projected earnings. Companies are putting AI into their budgets before they’re exactly sure how they’ll put it to work.
However, there are key differences between today’s AI gold rush and the dot-com bubble of 25 years ago.
First, stocks that made millions in the dot-com days appeared out of nowhere and had no products and no revenue. Everyone was betting that hype would turn into reality.
In contrast, AI’s market leaders are established companies with real products. OpenAI is on track to collect $200 million in revenue this year from sales of its ChatGPT AI. Nvidia, which owns more than 80 percent of the market of AI computer chips, was well-established before the public heard of “generative AI.”
“One reason why this [stock market] rally might lack the boom-and-bust nature of the dot-com bubble: the beneficiaries of artificial intelligence were the stocks already shining this year,” The Wall Street Journal noted.
Second, AI has eager markets the world over. Health care providers, investment firms, news organizations, entertainment empires, and other businesses already are putting it to work. Developers are creating apps for every kind of business and virtually every personal activity.
Compare that to dot-coms that often had no evidence that anyone would use what they were creating.
There still are likely to be losers among stocks now floating on the wave of eagerness for anything AI. Even though this isn’t a rerun of the dot-com bubble, caution is still a watchword for investors.
“There’s a huge boom in AI,” Kai Wu, chief investment officer at Sparkline Capital, told the WSJ. “Some people are scrambling to get exposure at any cost while others are sounding the alarm that this will end in tears.
“Investors can benefit from innovation-led growth but must be wary of overpaying for it,” he added.
TRENDPOST: In today’s stock market, hype has no takers. Venture capitalists and asset managers are playing it cautious. Even though AI is the obsession of the moment, only serious ventures can win funding. That also will help reassure investors that the current AI frenzy will not become tomorrow’s AI bust.