AI stocks have blown up over the last few years. In fact the US stock market push is mostly fueled by the surge of AI stocks. However, many question the sudden rise, likening it to the dot-com bubble of the last 90s. Let’s discuss if the current AI stock surge could lead to another dot-com bubble-like crash. What are the similarities and what are the differences?
AI Stocks Vs Dot-Com Bubble: Similarities and Differences
The similarities between the AI surge and the dot-com bubble are plentiful. Both periods are characterized by huge excitement, FOMO (Fear Of Missing Out), and rapid price gains. Many companies have begun entering the AI space to garner more attention, similarly to how companies added “.com” in the late 90s. This is not surprising, given that AI stocks are trading at elevated levels when compared to historical averages.
Another similarity is how companies in the late 90s rushed to build internet infrastructure, similar to how companies are rushing to build data centers today.
However, there is a stark difference between the dot-com bubble and the current AI stock surge. During the dot-com bubble, Nasdaq climbed to a high of about 5,048 in March 2000. However, the index crashed by nearly 78% by 2002. At the time, hundreds of internet companies had weak business models and were fueled by speculation instead of revenue. The AI stock surge to today, on the other hand, is driven by the growth of companies such as Nvidia (NVDA), Microsoft (MSFT), Alphabet (GOOG), etc. Although there is some amount of speculation, the overall growth is also driven by high profits and cash flow. Nvidia’s profit margins have gone beyond the 50% mark in recent times.
Safer Times?
While the rapid surge in AI stocks has caused some worry, the market could take a different turn this time around.
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The demand for AI-related services have been going up over the last few years. The high demand and real-world use cases for AI services is something the dot-com era did not see. Moreover, the surge is concentrated among the top companies, and not spread out across the board. The concentration could provide some safety to the larger market.