The AI boom is drawing comparisons to the dot-com boom, but an expert warns that there is one major difference that makes the current frenzy far more perilous.
Investor interest in AI reached its peak last year as large-cap stocks, such as Nvidia, reaped substantial profits from their AI investments. Nvidia, a leading computing chip maker, saw its stock soar by 239% in 2022 and continues to grow.
The enthusiasm for AI is also evident in the high valuations of companies like Intel and Nvidia. Nvidia’s stock trades at nearly 32 times its next 12-month price-to-earnings ratio, reflecting investors’ hopes that AI will revolutionize the global economy, enhance productivity across all sectors, and drive groundbreaking products.
This scenario resembles the excitement surrounding the internet in the late 1990s. Although the internet did bring about significant changes, many aspects of our daily lives remain largely unchanged.
According to Erik Gordon, a professor of business studies at the University of Michigan’s Ross School for Business, both the internet and AI have the potential to be revolutionary. However, he cautions that investing in companies based solely on these scenarios may not be wise. The value of AI companies may be overinflated compared to their actual worth, and some early pioneers in AI may fail, despite the future importance of AI.
Nvidia’s revenue surged to $61 billion in the past year, a 126% increase compared to the previous year, and its net income skyrocketed by $30 billion, a staggering 600% surge. This makes Nvidia the frontrunner in the AI race, which has attracted investors and boosted the company’s stock price by 600% since the beginning of 2023. As a result, Nvidia’s market cap has reached $2.2 trillion, up from $400 billion.
Interestingly, investors are now turning their attention to nuclear energy and uranium-related stocks and ETFs, as AI’s power-hungry nature drives demand. The price of uranium has increased by 70% over the past year.
Gordon points out a crucial difference between the internet and AI frenzies. While internet pioneers were mostly small companies, AI is dominated by tech giants like Alphabet and Microsoft. These industry leaders, along with other tech titans, have made substantial investments in AI, with a British Market watchdog identifying 90 partnerships involving these companies.
However, Gordon highlights the fact that these tech giants can afford to lose billions of dollars and still remain in business. In contrast, when dot-com firms failed, smaller shareholders suffered the most. With the big tech brands holding a significant portion of the US stock markets, any failures could result in decreased stock prices that would impact many small shareholders. Thus, Gordon warns that the current situation is an overvaluation bubble of a much larger magnitude.
