- The AI frenzy has some aspects of dot-com mania, but with one big and dangerous difference.
- Professor Eric Gordon pointed out that there are far fewer investors in Internet startups than in Big Tech today.
- Companies like Nvidia are huge and profitable, but if they go bankrupt there will be far-reaching consequences.
The AI boom is similar to the dot-com bubble, but there's one big difference that makes it more dangerous, one expert says.
Lofty valuations for companies like Nvidia reflect investors' excitement about artificial intelligence. They are betting that this will dramatically increase productivity, power innovative products and services, and fundamentally change the global economy.
This was also the case in the late 1990s and early 2000s, when people were losing their minds about how the Internet could change every aspect of their lives.
Eric Gordon, a professor at the University of Michigan's Ross School of Business, told Business Insider that the internet was revolutionary, and AI will be, too.
“Both themes are valid,” he said. “But that doesn't mean that companies evaluated based on these themes were or are good investments.”
“Many of the dot-com companies that drove the changes in the Internet went bankrupt by making that change. Many of the AI companies that drove the big changes will go bankrupt or lose half their value.”
In other words, even if AI becomes the next big thing, valuations for AI companies can still be crazy, and pioneers in the field can still crash and burn.
Nvidia has been one of the biggest winners in this frenzy. The chipmaker's revenue rose 126% to about $61 billion last fiscal year, and its net profit rose nearly 600% to about $30 billion.
Growth-seeking investors have pushed Nvidia's stock price sixfold since the end of 2022, rocketing its market value from less than $400 billion to about $2.2 trillion.
The deeper the pockets, the more pain.
Gordon, who teaches entrepreneurship and studies various aspects of financial markets and technology, emphasized that there is a big difference between dot-com maniacs and AI maniacs.
While the pioneers of the Internet were mostly small startups, leaders in the AI field include established and profitable giants like Microsoft and Alphabet.
“They can lose billions of dollars, but they won't go bankrupt,” Gordon said.
But the flip side of the coin is that dot-com startups didn't have large shareholder bases, so if they went bust, “only the bravest or the stupidest investors were hurt.”
By contrast, the big tech names that dominate AI account for a large portion of the value of the U.S. stock market and are mainstays in pension funds and retirement portfolios.
“Big companies that are pioneers in AI won't go bankrupt, but if their stock prices fall due to AI losses, many investors will suffer,” Gordon said.
He has previously drawn a line between the dot-com bubble and the tech stock boom.
“This is not a fake corporate bubble, but an order of magnitude overvaluation bubble,” the academic told BI in early 2022.