The eerie parallels between AI mania and the dot-com bubble

Is it karma?

- James Mackintosh

Coincidence? Either way, the ghost of the dotcom bubble is back 25 years late. Shares in Cisco Systems, the dotcom-era champion that became the world’s most valuable company at its peak in March 2000, this week reached that level again for the first time. It’s a cautionary tale of how far stock prices can depart from reality.

Bulls spend a lot of time denying that there's a 1990s-style bubble inflating again in artificial intelligence. But it’s worth going through a few of the striking similarities, and some notable differences.

Valuation

There are lots of ways of valuing stocks, and pretty much all of them make U.S. shares look the most expensive since the dotcom bubble. The forward price-to-earnings ratio, price to cash flow, the “Fed model” calculation of the extra reward offered by stocks compared with bonds and the cyclically adjusted PE ratio all scream that stocks are expensive.

The reason is common to them all: Investors are, just as in 1999-2000, betting on a new technology to deliver much faster than usual profit growth, If it happens, it justifies higher valuations.

Uncertainty

Just as the dotcoms were priced based on hope that the internet would deliver a new era of profits from business models that were yet to be proven, so with AI. Generative AI has delivered chatbots and image generation that seem to be not far from magic—but is, for now, priced well below what it costs to produce, leading to big losses at AI businesses. One difference: Many of the pure-play dotcoms didn’t even have revenue, while the AI companies are at least making some sales.

Investment