Does the AI Boom Parallel the Dotcom Bubble?

It’s safe to say that Wall Street has jumped on the artificial intelligence (AI) bandwagon, with a surge in the Nvidia (NASDAQ:NVDA) share price alongside other AI-related stocks. Big Tech has entered the AI fray as well, with Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOGL), Meta (NASDAQ:META) and Microsoft (NASDAQ:MSFT) all striking partnerships with cutting-edge AI startups.

As a result, AI is rapidly evolving, fueling a surge in investor excitement. However, whispers of a potential bubble have emerged. Some see parallels between the current AI boom and the dotcom bubble of the late 1990s. Speaking to Investing.com, Kempten Schwab, managing director at STS Capital Partners, assessed the topic.

The Dotcom Bubble - What Happened?

The dotcom bubble was a period of inflated market valuations for internet-based companies, peaked in March 2000 before bursting later that year. Fueled by widespread optimism about the potential of the internet, investors poured money into internet-focused companies, often with little regard for profitability or a clear business model.

This frenzy drove stock prices to unsustainable levels that ultimately proved to be misplaced. When the bubble burst, many of these companies saw their valuations plummet.

Are AI Stocks The Next Dotcom Bubble?

There are, of course, parallels between the AI boom and the dotcom bubble. Both eras witnessed a surge in investor enthusiasm for revolutionary technology, leading to a rise in valuations and a focus on hype over fundamentals.

AI startups, similar to early internet companies, often lack established track records of profitability and rely heavily on future potential. Given AI's recent emergence, this doesn't guarantee failure, but it can create a situation where stock prices become disconnected from a company's actual earnings or ability to generate revenue.

Should investors be concerned? Caution is certainly warranted. The dotcom bubble serves as a stark reminder of the dangers of excessive hype and unchecked speculation. While it's probably too early to say whether the comparisons will result in the same outcome, investors should always carefully scrutinize AI companies, evaluating their business models, competitive landscapes, and paths to profitability before investing.

How Hype Drives Irrational Investment Behaviour

Kempten Schwab told Investing.com that any investor must understand the fundamentals of every company in which they are considering investing.

While AI is generating product solution technology from material accessible to them, “you have to look beyond that,” he states.

Schwab says investors should assess factors such as who owns the development of the source code, how is the intellectual property protected, and what is the purpose

“What competitive advantage is created - Underling value proposition serviced or being created by the artificial intelligence,” he adds. “If the further the decision maker is from understanding value to cost equation, the higher the likely the irrational investing behavior will be.”

Schwab says people are “investing without rationally understanding, because the pace of the advancement of technology is faster than the pace of an investor as the decision maker,” noting the “tremendous uncertainty and unknowns” in the areas of regulation, and governance of these unchartered spaces.

Is OpenAi the next Netscape?

Schwab believes that “every organization has to be judged on its own merits,” highlighting that there may be a diamond of the rough with the appropriate value proposition that is a wonderful opportunity to invest low and exit high.

“However, there can be a lot for coal,” he adds. “People paying diamond prices for items that will be obsolete by the time that investment delivers meaningful value; if ever.”

Schwab states: “Technology is developing at an accelerated pace. Advancements are at a pace faster than the decision maker typically embraces. By the time the process takes place to acquire the company, its ‘high level’ value may have depreciated.

“Better bets are where are the deeper pockets are. Who has the power/wealth - Meta. Apple (NASDAQ:AAPL). Google. Which companies can invest in the human beings that will advance artificial intelligence.”

Discover more about AI stocks

Looking to assess the performance of other AI stocks? If you’re interested in a safer, diversified approach to investing in AI, consider exploring AI ETFs, which offer exposure to a basket of companies involved in artificial intelligence technologies. Our page provides information on various AI ETFs, allowing you to assess their performance alongside individual AI stocks.