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If you invest in the late 1990s, you will remember the euphoria of the dot-com boom. Anything with “.com” at the end of that name could raise millions of capital, allowing it to see its stock price twice or triple overnight.
Investors believed the internet would change everything. That was ultimately to be fair. But between 2000 and 2002, that dream turned into a nightmare when the Nasdaq lost nearly 80% of its value and wiped out trillions of dollars in wealth.
Today, artificial intelligence is leading the headlines and fostering investor enthusiasm, so many people wonder if we are trying to experience another dot com bust?
AI feels like the new internet. It is a transformative technology that promises to overturn the industry from healthcare to entertainment funding. (/istock)
Similarities to the late 90's
There are some undeniable similarities between the two periods. At the time, internet companies with business plans and websites were rated at the astronomical level. Today, AI feels like the new internet. It is a transformative technology that promises to overturn the industry from healthcare to entertainment funding. The story is powerful and capital hastens. Recently, the fan favorite stock, Palantia, has been traded with 522 PEs!
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Another similarity is market concentration. In 1999, Cisco, Intel, Sun Microsystems and AOL were kids on the booming posters. Fast forward to today, the so-called “magnificent 7” – Apple, Microsoft, Alphabet, Amazon, Meta, Tesla and Nvidia account for more than 30% of the S&P 500 overall.
Looking at that, the S&P 500 should be a diverse index of top American companies. But if only a handful of stocks drive most returns, if those companies stumble, they create real risk. The top 10 S&P 500 shares have a market capitalization of almost 40% of the overall S&P 500 index.
Important differences
The echoes in the dot com era are big, but the difference is even greater.
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Firstly, the ratings are growing, but they're not as ridiculous as they were in 1999. At the time, the S&P 500 had a forward price (P/E) ratio of over 25. Many internet stocks have no revenue at all, and traditional valuation indicators are meaningless.
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Today, the S&P 500 has a forward P/E ratio of about 21 years old. This is rising compared to the long-term average of 15-16, but there is nowhere near the territory of dotcom. Importantly, the tech giant that controls today's index is a highly profitable business that generates enormous cash flow. The only area where you can see these dot com patterns pop up is AI stock. Slap the two-letter AI next to the inventory, making it a feeding frenzy for investors.
Second, fee-driven companies are not speculative startups with unproven business models. Apple, Microsoft and Alphabet are trillion dollar companies with fortress balance sheets and consistent profitability for decades. Nvidia, the crown jewel of AI trade, sells real products in extraordinary demand. Unlike Pets.com, Webvan.com, and Etoys (remember?), these companies have sustainable revenue streams and durable competitive advantages.
Is ai a new.com?
There's no doubt that you'll feel that AI is bubbly. Just as investors in the late 1990s believed that all businesses would be transformed by the internet, many now believe that AI will change every corner of the economy. Some of this optimism is justified.
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The Internet has changed the way we live today. AI can increase productivity, reduce costs and create whole new industries. However, in the short term, the market mostly overestimates the speed of adoption, and AI companies are starting up so quickly that many companies can fail.
That's where the risk lies. It's not about whether AI will change the world, but how quickly investors think it will happen. History teaches us that transformative technology often passes through a hype cycle. We have thought up until now that people have not written checks yet, but 50% of Americans have written at least one check in the past 12 months. There are winners, but there are also plenty of losers along the way.
Why isn't this 2000?
Despite the hype, I don't think we're heading towards a repeat of dot-com crashes. Here's why:
- Profitability: The biggest company in the S&P 500 is cash generators. Apple alone earns more than $100 billion in free cash flow per year. That's a far cry from past cash burning.coms.
- Stronger balance sheet: Corporate America is healthier than it is today. Many large companies have large reserves of cash with low debt. In 2000, the balance sheet was much weaker.
- Regulation and maturity: The financial system is more prepared. The lessons learned from the 2008 crisis have created a more careful capital market.
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Is there any volatility? absolutely. Some AI-driven stocks are at perfect prices and are fixed when reality is not reaching expectations. However, as we saw from 2000 to 2002, the wholesale collapse of the market is unlikely.
A better comparison may be the railroad boom of the 1800s. Railways changed the economy, and many companies failed along the way. But the infrastructure they have fueled America's growth for over a century. AI may follow the same path – it is messy in the early days, but ultimately changes the world.
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