The AI boom reminds this expert of the dot-com bubble — with one dangerous difference
Johannes Eisele/AFP via Getty Images
- The AI frenzy has shades of dot-com mania but with one big, dangerous difference.
- Professor Erik Gordon noted internet startups had far fewer investors than Big Tech does now.
- Companies like Nvidia are huge and make money, but if they do crash there'll be sweeping fallout.
The AI boom resembles the dot-com bubble — but there's one big difference that makes this craze far more dangerous, says one expert.
The princely valuations of companies like Nvidia reflect investors' excitement about artificial intelligence. They're betting it will supercharge productivity, power transformative products and services, and radically change the global economy.
It was a similar story in the late 1990s and early 2000s, when people lost their minds over the internet's potential to reshape every aspect of their lives.
The internet was revolutionary and AI will be too, Erik Gordon, a professor at the University of Michigan's Ross School of Business, told Business Insider.
"Both themes are right. But that doesn't mean companies with valuations based on those themes were or are good investments," he said.
"Many dot-com companies that drove the internet change went broke doing it. Many AI companies driving as big a change will go broke or lose half their value."
Put another way, even if AI is the next big thing, the valuations of AI companies may still be out of whack, and trailblazers in the space might still crash and burn.
Nvidia has been one of the biggest winners from the frenzy. The chip maker's revenues soared 126% to about $61 billion last financial year, fueling a near-600% rise in net income to about $30 billion.
Growth-hungry investors have driven Nvidia's stock price up six-fold since the end of 2022, catapulting its market value from below $400 billion to some $2.2 trillion.
Deeper pockets, more pain
Gordon, who teaches entrepreneurship and researches many aspects of financial markets and technology, underscored one big difference between the dot-com and AI manias.
While the internet's pioneers were mostly small startups, the leaders of the AI space include established, profitable titans like Microsoft and Alphabet.
"They can lose billions of dollars and not go broke," Gordon said.
But the flip side is dot-com upstarts didn't have massive shareholder bases so when they crumpled, "only brave or foolish investors were hurt."
In contrast, the Big Tech names dominating AI make up a huge chunk of the US stock market's value, and are mainstays of pension funds and retirement portfolios.
"The giant AI pioneers won't go broke, but if AI losses drive their stock prices down, lots of investors will suffer," Gordon said.
He's previously drawn a line between the dot-com bubble and the tech-stock boom.
"This isn't a fake-companies bubble, it's an order-of-magnitude overvaluation bubble," the academic told BI in early 2022.