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  • Writer's pictureRealFacts Editorial Team

AI Surge and the Parallels with the Dot-com Bubble

man looking at numbers

The current enthusiasm over artificial intelligence has pushed the S&P 500 and the tech focused Nasdaq composite to all-time highs.  The Nasdaq composite has grown by over 70% since the start of 2023 largely due to companies like Nvidia that have led the world into the AI era.  This rapid expansion of the AI industry and the increasing capital flowing into AI companies bear stark similarities to the infamous dot-com bubble, which concerns investors.

Nvidia’s staggering 5-year return of 4,300% evokes memories of the network equipment maker, Cisco’s rise and fall during the dot-com bubble. Leading up to the year 2000, Cisco rode the wave of the internet's transformative potential to connect companies with millions of customers in seconds. This surge caused a massive influx of capital and interest in dot-com companies, propelling Cisco's stock to a remarkable 4,500% return over 5 years before the crash.  Nvidia’s rapid growth has some investors worried that it might face a similar fate as Cisco which lost 89% of its value after the crash.

Upon closer examination some key differences arise between today’s AI run and the previous dot-com bubble.  The current AI push in the stock market has been backed by strong revenue growth and company fundamentals unlike at the turn of the century where the frenzy speculation of future growth led to the increase in valuations of tech companies.  At the height of the dot-com bubble valuations for the tech sector sat around 48 times forward earnings and an absurd P/E Ratio of close to 200.  This is in stark contrast to the current valuation of the tech sector which is at 31 times forward earnings and has a P/E of around 30.  

As the AI boom continues to boost the S&P 500 and the Nasdaq to new heights, there is data that suggests that a repeat of the dot-com bubble crash is unlikely to happen.  Nvidia and AI’s swift rise may mirror past tech giants, yet fundamental differences in valuation and revenue growth suggest a more stable foundation this time around. While history reminds us of the risks, today’s AI landscape appears to be on a sturdier footing, blending innovation with fiscal prudence for sustainable growth.


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