Is the AI boom another dot com bubble?

Is the AI boom another dot com bubble? That is what many investors are wondering as AI (Artificial Intelligence) grows and companies left, right and centre announce plans to use AI. Will they really benefit as much as they claim they will? Or will history repeat itself? Will it be another dot com bubble?

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Is the AI boom another dot com bubble?

Long story short, we think it is and it will not be. We certainly don’t think the AI boom will be in the sense that this’ll end up being a broader market crash. We think a more analogous comparison is the cannabis boom of the mid-2010s, not many companies will find it game-changing to the degree they claim it is. Some investors will profit from backing the right horses, but plenty of others will lose money from picking the wrong companies.

We think the wisest way to play the AI game will be to invest in companies for which AI could make a difference, but the failure of it won’t be the death of the company. Make your choices wisely.

If the AI boom is another dot com bubble, then what?

Then we’ll see a wide-spread crash across markets worldwide, from the ASX to Wall Street. By crash, we don’t just mean a 10-20% correction but 50%+ as happened during the GFC and the dot com bubble. The NASDAQ crashed 80% in the latter crisis.

Let’s delve on the dot com bubble for a brief period. The late 1990s saw a surge in investor enthusiasm for technology and internet-based companies. Many investors were eager to invest in the “next big thing” without fully understanding the business models or financial fundamentals of these companies. This speculative frenzy led to inflated stock prices and a market bubble. Many dot-com companies, especially startups, were highly overvalued. These companies often had little or no profit or revenues (sometimes not even much of an operation – Peter Thiel reported in one of his books that he had a friend preparing an IPO for a company that had not even been incorporated yet). However, their stock prices soared based on the expectation of future growth and market dominance. Valuations were driven by the belief that the internet would revolutionise business and daily life, leading to unrealistic projections of future earnings.

Now if we look at today, there are some companies with no revenue and profit that have their share prices surging, and the chickens will come home to roost with these companies if push doesn’t turn to shove. These are the kinds of companies we noted above will lose. But what about larger companies?

There are some companies that may invest too much in AI. While they will be able to concede defeat and move on, they will be scuitanised heavily – like Meta Platforms which has put so much money into the metaverse which has not become what Mark Zukerberg anticipated it would be. But it is not as if Facebook and Instagram are going anywhere any time soon.

Others could well be silent winners. They may invest in capabilities as part of an ordinary course of business and reap benefits. It may not be in their core operations, but even just in their back office, whilst securing cost reductions.

Conclusion

We doubt the AI boom will crash like the dot com bubble did, but we think it is inevitable that some companies will not succeed and this will cause investors in those companies to lose money. We recommend caution in investing in AI stocks, particularly start ups with little revenue and no profit. The biggest winners will be larger companies that can invest in AI without sacrificing short-term cash flow or profitability, and could theoretically ‘pull the plug’ with little damage other than eating humble pie in the short-term.

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