(Bloomberg) – Innovative new technology comes along and drives investors into its seemingly endless possibilities. Euphoria gush stock market gatherings. In the end things get overheated and stock prices are ridiculous. Then it all falls apart.
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Does it sound familiar?
Just 25 years ago, about five years of dot-com bubble came out, leaving behind a trillion dollar investment loss. On March 24, 2000, the S&P 500 Index posted a record level that would not be seen again until 2007.
These peaks marked the end of electric driving, which began in the early blowout public offerings at Netscape Communications Corp., which began trading in August 1995. During March 2000, the S&P 500 almost tripled, with the Nasdaq 100 rising 718%. And that’s over. By October 2002, more than 80% of the value of the NASDAQ was gone, and the S&P 500 was essentially reduced by half.
The echoes of that era are echoing now. This technology is artificial intelligence. The S&P 500 peaked last month after a wild stock market rally that rose 72% from the trough last month, adding more than $22 trillion in market value in the process. Stock is beginning to sink, the Nasdaq 100 has lost more than 10%, falling into a fix, and the S&P 500 has dropped to that level for a short time. And this symmetry has lifted some horrifying memories for a quarter century.
“Investors have two feelings: fear and greed,” says Vinod Khosla, billionaire venture capitalist and co-founder of Khosla Ventures, who remains one of today. “I think we moved from fear to greed. If you become greedy, you’ll say a promiscuous evaluation.”
Differences in degrees
However, the main difference between the era of dotcom and AI is the degree. The latest boom has been eye-opening, but it pales in comparison to the extremes of the Internet bubble.
“The internet was a huge idea and had a very transformative impact on society, the business, the world, those who played it safely, and those who were generally marginalized,” said Steve Case, former chairman and CEO of AOL. “It focuses on this kind of large investment to make sure you’re not left behind. Some of them work. Many of them don’t work.”
Case has become the face of the dot-com boom when he bought Time Warner in January 2000, and you know one or two about a technology investment or two, given that AOL’s stock price was high, so he became the face of the dot-com boom. However, the transaction quickly became sour as there were no meaningful combinations on paper. AOL Time Warner stocks were tanked as revenues deteriorated, and in 2009 the combination finally rewinded.
This is something Wall Street is worried about right now.
“There was a lot of hype around the internet, and this was embodied before everyone had a business model to make money from the internet,” said Daron Acemoglu, a Nobel Prize-winning MIT economist. “That’s why there was an internet boom and an internet bust.”
Companies involved in the AI boom are very different from those that dominate the DOT-COM era. The Internet bubble is built primarily on unprofitable startup businesses, some of which added “.com” to their names to allow stocks to be sold to the public. Meanwhile, the euphoria surrounding AI is concentrated in small groups of high-tech companies, including Alphabet Inc., Amazon.com Inc., Apple Inc., Meta Platforms Inc., Microsoft Corp. and Nvidia Corp., which have become one of the most profitable and financially stable companies in the world.
For example, look at the amount of capital generated by today’s tech giants. Analyst estimates compiled by Bloomberg show that this year alone, Alphabet, Amazon, Meta and Microsoft are expected to develop AI capabilities by cultivating a total of $300 billion into capital expenditures. And even all of that spending is projected to still generate $234 billion in free cash flow.
Burn rate
Dot-Com Boom was not there because it was about speculative investments in startups that had no profit.
“We’re looking forward to seeing you in the future,” said billionaire investor Ken Fisher, chairman of Fisher Investments. “What makes a bubble bubble is a negative burn rate. In 2000, companies were just recognized as good, and there was a “different this time” thinking because of the internet. ”
Differences between companies that promote happiness make it difficult to compare stock valuations between two periods using traditional measures such as price and return rate. In 1999, the NASDAQ Composite Index, which housed most companies in the internet boom, reached around 90 P/E ratios based on estimates at the time. Today, it’s about 35.
But in reality, the whole concept of valuing stock prices in P/E ratios looked like PASSE during the Internet bubble. So Wall Street invented new indicators like “mouse clicks” and “eye balls” to measure growth without money.
That may seem crazy now, but many investors at the time didn’t bother me as they were betting on an endless future burned into the growth assumptions of the Internet. Furthermore, inventory continued to rise.
“We are pleased to announce that Anthony Saglimbene, Chief Market Strategist at Ameriprise Financial, said: “They built as much from their investment as their salary.”
By March 2000, at least 13 Nasdaq 100 companies had burned cash over the previous year, according to data compiled by Bloomberg. As a result, investors had little fear of buying shares at financial burden companies such as Pets.com and Webvan.
“It was a land grab,” said Julie Wainwright, former CEO of Pets.com. The company received a major boost in June 1999 when a group of investors, including Amazon, invested $50 million. “I think seven other pet companies were funded shortly afterwards. That definitely didn’t make any sense.”
Pets.com was released in February 2000 and went out of business by November, just as the internet IPO epidemic peaked. Wainwright eventually achieved success in the e-commerce landscape and founded the online luxury goods market RealReal Inc., which was released in 2019.
The right call, the wrong time
Eventually, due to the confluence of factors, the dot com bubble ended. The Federal Reserve has begun to aggressively raise interest rates to slow the stock market vibrancy. Meanwhile, Japan was in a recession, causing fear of a global slowdown. As the market is booming at an all-time high, investors suddenly became skeptical of profitless stocks.
“They were right to bullish about the Internet business outlook,” said Jim Grant, founder of Grant’s Interest Rate Observer. “Were they right to pay 10 times more revenue than Sun Microsystems?
To Grant’s point, many of today’s corporate giants (Alphabet, Meta, Apple, Microsoft) were built or turbocharged on the internet boom. And for each of them, dozens of companies, including Uber Technologies Inc. and ServiceNow Inc., used technology in new ways that they imagined at the turn of the millennium.
“It happened gradually: the internet embrace,” said Rob Arnott, founder and chairman of the researcher. “Humans are creatures of habit, and most of our internet embraces were progressive. Today, we use the internet for everything. In 2000, it wasn’t that true.”
But that’s not so painful for around $5 trillion.com wipeouts. In many ways, the internet turned out to be a proper investment, but at the wrong time.
ai dream
The risk for investors today is that the scenario could unfold again. AI inspires the dreams of computerized personal assistants intertwined with every aspect of our lives. New technologies handle our transportation, teach our children, provide daily medical care, create entertainment, manage daily home errands and chores.
And it may turn out to be true. However, when it comes to tech-driven bubbles, the real winner is rarely revealed anytime soon. The idea that the biggest beneficiaries from AI may not exist yet is a lesson from dotcom that former Pets.com CEO Wainwright has been thinking a lot recently.
“All the innovations came from very small companies,” she said. “It may still be happening.”
The emergence of sophisticated chatbots built in China called Deepseek exposed this risk just a few months ago. The revelation caused a $58.9 billion defeat to Nvidia’s shares in fear that cheaper AI models would SAP the demand for computing gear. It reminded me that AI’s advantage is not certain for investors.
This also explains why the Tech giant was willing to spend a lot of money on developing technology, at the expense of eroding profit margins. The challenge is to ensure that they are always on top of a rapidly evolving revolutionary industry. And that’s the price they’re willing to pay.
“We’ve seen almost every stage of technology since 1980,” Khosla said. Khosla was one of the most shrewd investments in the Juniper Network of the DOT-COM era and, more recently, an early investor in Openai. “And I can’t see any change in the past that is greater than AI.”
– Support from Tom Contigliano.
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