Are We In a Giant AI Bubble?
We gotta talk AI and bubbles.
This has played out many times: Investors overhype an emerging technology, prices rise, and stocks eventually crash.
Is it different this time? According to Lance Roberts of RIA Advisors, valuations suggest that the AI ride will ultimately end.
He compares the return of the tech-heavy Nasdaq index during the ‘99 dot-com bubble and today’s generative AI run.
What came next? The Nasdaq collapsed over 70% in the following three years. But 2023 isn’t the same as 1999.
- Why stocks might not fall as hard: Manydot-com bubble companies made little money, had no business model and deserved to go to zero. Today, companies are much more established and are making boatloads of profit.
- Why stocks might not rise as much: Stocks today are much more expensive. Microsoft (NASDAQ:MSFT) has a price-to-sales multiple of 11x today vs. 3x in 1994 — and Nvidia (NASDAQ:NVDA) trades at a 27x multiple.
The higher this ratio, the more expensive the company, the less room there is for error — and the lower their potential upside.
Tech giants will benefit from AI — but it’s uncertain whether that growth can support their current valuation.
Here’s your warning
“A lot of money will be made in ‘AI’ before this phase ends. But as with all market phases in the past, the end of the era was simply a function of the realization that ‘valuations matter.’” **— Lance Roberts.
And if AI turns out to be what it’s hyped up as, like the internet, investors will have many chances to invest at better prices in the coming decades.