AI is starting to look like the Dot Com bubble

By | August 11, 2023

As the AI ​​industry’s market capitalization continues to explode, experts warn that its meteoric rise is eerily similar to that of another—and significant—moment in economic history: the dot com bubble of the late 1990s.

The dot com bubble – and subsequent crash – was an era defined by a gold rush-like frenzy and inflated valuations. Hungry to cash in on a new, lucrative technology age, venture capitalists began throwing big bucks at companies that, while making all the right promises about their ability to change the world, had yet to prove their viability. And when the vast majority of these ventures ultimately fell short, they failed, swallowing about $5 trillion in fundraising as they sank into www dot oblivion.

Fast forward to today, which The Wall Street Journal details in a new report, and the same gold rush energy is palpable in the burgeoning AI market. VCs are all too happy to pour huge amounts of cash into a growing constellation of AI companies, even those that have yet to turn a profit. Or, for that matter, has yet to introduce a noticeable product.

Company executives, meanwhile, continue to make sweeping claims about the transformative power of their technology, which they consistently claim could save the world, destroy it, or — conveniently — both. Investors keep biting, and as of WSJstocks keep rising — shares of Nvidia, for example, the chipmaker whose GPUs are coveted for AI projects, have tripled in value this year, while tech giants like Meta, Microsoft and Amazon, all working on AI technology, have seen their stock prices skyrocket by 154 percent, 65 percent and 35 percent respectively.

And yet, even though the technology is impressive, its true value – nevermind path to profitability – is still wildly unclear.

“There is a huge boom in artificial intelligence – some people are scrambling to get exposure at all costs, while others are sounding the alarm that this will end in tears,” said Kai Wu, founder and chief investment officer of Sparkline Capital. WSJ. “Investors can benefit from innovation-led growth, but must be wary of paying too much for it.”

Another striking similarity between AI and dot com? Market concentration. Per it WSJthe top ten stocks in the S&P 500 right now make up more than a third of the total market, and this “concentration of leadership,” as Mike Edwards, vice president of investments at Weiss Multi-Strategy Advisers, told WSJ, is “the market story that rhymes most with the Internet bubble.”

But while the comparisons between these economic times certainly shouldn’t be ignored, there are also some big differences. Most notably, most of the biggest players in the AI ​​industry are longtime Silicon Valley behemoths, and have been working to develop the technology for quite some time. Think Google, Meta, Microsoft, Amazon and so on. Some of these companies are even dot com survivors, and have been able to stay afloat amid various technological trends for decades.

And of course, a fair share of newer companies have entered the public main stage. But even the most prominent upstart of the bunch, the heavily Microsoft-funded OpenAI, was founded by a bunch of Silicon Valley vets — Sam Altman, Peter Thiel, Reid Hoffman, the since-departed Elon Musk, et al. – with deep technological ties. . The same goes for ventures like Character.AI and Humane Inc., founded by former Google and Apple executives, respectively.

“It’s not like 1999 when investors were running toward hot IPOs for companies that had no chance of making money,” Edwards said WSJ. “Today’s winners are disciplined, huge companies that have moats in place and data sets to exploit.”

Yet even the most experienced companies, executives and VCs can get too caught up in the hype of it all and may well stumble in the race to establish their dominance and relevance in a changing technological landscape. Plus, as a general rule, a high-dollar feedback loop never feels very healthy, and cracks in some leading industry players are already starting to show.

As a select few dot com companies did, some AI ventures are likely to stick around. But many of them probably won’t, and given what we know about the ghosts of dot com’s past, caution—something often lost in the fog of war—is more than warranted.

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