The dot.com bust anniversary approaches and fears of an AI bubble are brewing
Susannah Streeter, head of money and markets, Hargreaves Lansdown: ‘’In the dot.com universe hundreds of stars were shining bright, as hyper-enthusiasm for the digital world took hold of market sentiment. Low interest rates, and frenzied interest in tech companies taking off in the new online arena meant capital flowed thick and fast to startups making big promises. When interest rates started to ratchet up and funding dried up the dot.com party ended in dramatic fashion. The big bust when it came shattered confidence and rocked the foundations of online world, as irrational exuberance blew up in investors faces. Failures littered the tech landscape including online shopping companies Webvan.com, Pets.com and Boo.com, communications firm WorldCom and content network Broadland Sports. Survivors saw their share prices battered. Networking equipment IT company Cisco, which had swelled amid the hype to become the most valuable company in the world, with a price to earnings ratio of 201, saw its shares fall 88% and its stock has still not fully recovered. Amazon shares soared in value in 1999, before collapsing in spectacular fashion. Shares fell 90% as the company, then known as an online bookseller, was hit by the crisis of confidence as the noughties era began.
At the 25th anniversary of peak dot.com, there are fears another bubble could be blown, as investors have been caught up in waves of tech speculation, this time around the big promises of AI. Fired up by future visions of how artificial intelligence will shape our lives, investors have shown huge enthusiasm for tech firms with their fingers in all sorts of AI pies. But nervousness about the heady valuations reached have collided with worries about interest rates staying higher for longer, and the global effects of Trump’s trade policy. AI darling Nvidia has seen its shares fall around 15% year to date, while Tesla which has invested heavily in artificial intelligence technology including Optimus robots and the dojo supercomputer has fallen 26%. Palantir, which specialise in software platforms enabling AI driven decision making, has dropped by 20% since the start of the year.
But as the dot.com boom and bust tells us, there will be survivors of any storm on financial markets. Not all tech companies are created equally, and many will not live up to the AI hype. Others have opportunity stamped into their DNA and will be fit enough to weather a sudden drop in confidence. Nvidia stock may have soared by 400% over the last two years, but it’s still only trading at a PE ratio of 29 for the next 12 months, well below the level of some of the other stocks infused with AI enthusiasm. That’s not to say it won’t get sideswiped in any further sell-off but it’s earnings potential is not going to disappear overnight. Although there is some argument that traditional metrics can’t always be relied on when there’s constant redefinition of addressable markets, but for some stocks caution is warranted. Palantir, for example has a price to earnings ratio for the next 12 months of 168. While Palantir’s fourth quarter results demonstrate its market leading position in the AI-value chain, profits need to significantly, and consistently, outperform current consensus to justify the valuation, which is a challenge to be wary of. Despite its recent falls, Telsa’s forward price to earnings ratio still stands at 116. It may be on the verge of turning its next chapter, and it has the balance sheet strength to pursue its considerable range of growth opportunities. But with such a lofty valuation and the unknown of what’s to come in the AI world, investors will need considerable patience.
There are still likely to be casualties ahead when a market trigger sparks the next loss of confidence. But it’s worth bearing in mind Amazon’s trajectory. The stock may have fallen by 90% as the dot.com era crashed and burned, but it’s risen since in spectacular fashion with the online bookstore becoming not just an e-commerce behemoth but a giant global technology innovator and enabler. It’s risen 231,411% from its offer price of $18 at its IPO, which would make that initial investment in just one share, if it was still held, worth more than $41,000 today. A quarter of a century ago it was hard to foresee just how much of an impact the internet would have over all our lives. As with any rapidly developing technology, what may seem like skyrocketing prices can in hindsight be just another small step on a much bigger journey. But the rules of the AI game are evolving so quickly that some of the giants of the future may still be under the radar, with founders working in a lab, a garage or in a corner of a conference hall, with their innovations just waiting to be discovered.’’