Why AI Craze Is Eerily Reminiscent of Dot-Com Era

If a tech company has anything to do with artificial intelligence these days, it is golden. The biggest example: Stock in Nvidia Corp., which makes chips used in AI, has tripled in price this year, briefly topping $1 trillion in market value this past week and sporting a lofty price/earnings multiple of 208.

This craze has surfaced several skeptics who think AI is overhyped. Chief among them is BCA Research, which issued a report comparing the AI enthusiasm to the late-1990s dot-com boom, which did not end well for investors.

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Just as with the excitement over internet companies back then, investors are overlooking the fact that AI’s utilization is unclear, the research note said, so betting now is premature: “The economy-wide productivity gains from the rollout of the internet accrued before most firms figured out how to monetize it. The same could happen with AI.”

True, Nvidia is profitable, which could not be said about most of the 1990s dot-com bunch, a ragtag crowd of startups fueled by venture capital. But BCA’s note pointed out that the AI beneficiaries are largely big companies such as Microsoft. That will not last, BCA predicted, saying these few will get competition, which will complicate their ability to dominate the AI field.

“Although they are loath to admit it, most of the profits that today’s internet companies earn stem from the quasi-monopoly power that they enjoy,” BCA observed. “It is possible that AI will have the opposite effect, leading to more competition, not less.”

What’s more, the AI frenzy ultimately could produce problems for bond investors, BCA reasoned: “The surge in IT spending during the late 1990s extended the business cycle and pushed up bond yields. However, once the boom turned into a bust, yields fell more than they would have otherwise. AI could have a similar effect on yields—higher in the short run, lower in the long run.”

Still, on the plus side, stock fads in one category have a way of touching off rallies elsewhere, BCA counseled. It noted that after the dot-coms bombed, commodities took off, particularly oil. One reason was that investors, stung by internet losses, wanted to find another place to put their money. Oil was a good prospect at the time because China was expanding.

“The AI revolution could similarly drive up commodity prices, with metals being the biggest beneficiaries,” BCA’s note stated.

Certainly, beyond computer chips, AI does not need much in the way of raw materials. But it likely will make other areas of finance more efficient, BCA declared. For instance, McKinsey & Co. argued in a recent paper that AI will aid commodities traders in predicting pricing and other factors involved in the highly complex futures market for metals and other items.