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The surge in stocks related to artificial intelligence (AI) has many investors concerned that the rally is similar to the dot-com technology stock bubble in the 1990s. Although most AI stocks are far from the stretched valuations of dot-com stocks in the 1990s that pushed the Nasdaq 100 Stock Index ($IUXX) (QQQ) up more than 800% in five years, investors are concerned that ever-increasing valuations may spark a bubble in AI stocks.
With investors jumping into AI stocks at any price on fears of missing out (FOMO) on the rally, some analysts are concerned it could end badly. Jonestrading said the similarities between the dot-com bubble of the 1990s and today’s AI stock surge are undeniable. While it is still early in the investing cycle for AI stocks, they are keeping a close eye on valuations as FOMO can quickly send the stocks into “fantasy” territory.
Valuations have jumped to frothy levels on stocks such as Nvidia (NVDA) on expectations that demand for its chips to power AI applications will soar. Shares of Nvidia surged to an all-time high Wednesday, and its price-to-sales ratio hit a record 40 times. Some analysts remain wary of the market’s expectations for Nvidia. Boston Partners said, “People are assuming Nvidia is going to grow at 30% as far as the eye can see. Companies just don’t do that.”
The frothy valuation of Nvidia is drawing comparisons with Cisco Systems (CSCO) more than 20 years ago. Just before the dot-com bubble burst in early 2000, Cisco’s market value climbed to more than $500 million, a record it hasn’t come close to since, despite sales nearly tripling over that period. Its price-to-revenue ratio jumped to a high of more than 60 times in March 2000. It’s now priced at about four times. Cisco fell as much as -89% from its record high in March 2000, and it’s still down by more than -33% from that level.
According to Bloomberg data, of the ten best performers in the Nasdaq 100 in the year leading up to the index’s 2000 peak, only Qualcomm (QCOM) and Check Point Software Technologies (CHPK) still exist as standalone companies today. Wedbush Securities said it sees similarities between now and the dot-com era, but we’re still in the early stages rather than 1999 when the Nasdaq 100 doubled ahead of its meltdown the following year. Wedbush said, “AI is the most transformational technology we have seen since the Internet started to take shape. AI is driving the tech sector to a 1995 moment with a long runway of growth ahead that we have not seen since the 1990s.”
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
