AI Is Starting to Look Like the Dot Com Bubble

As the AI industry's market value continues to balloon, experts are warning that its meteoric rise is eerily similar to that of a different — 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 age of technology, venture capitalists took to throwing large sums at companies that, though they made all the right promises about their ability to change the world, had yet to actually prove their viability. And when the vast majority of these ventures ultimately fell short, they failed, swallowing roughly $5 trillion in fundraising as they sank into www dot oblivion.

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

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

And yet, though the tech is impressive, its true value — nevermind path to profitability — is still wildly unclear.

"There's a huge boom in AI — some people are scrambling to get exposure at any cost, while others are sounding the alarm that this will end in tears," Kai Wu, founder and chief investment officer of Sparkline Capital, told the WSJ. "Investors can benefit from innovation-led growth, but must be wary of overpaying for it."

Another striking similarity between AI and dot com? Market concentration. Per the WSJ, the ten biggest 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, the deputy chief investment officer at the firm Weiss Multi-Strategy Advisers, told the 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 some big differences as well. Most notable is that most of the biggest players in the AI industry are longtime Silicon Valley behemoths, and have been working on developing the technology for a while. Think Google, Meta, Microsoft, Amazon, and so on. Some of these firms are even dot com survivors, and for decades have been able to keep themselves afloat amid various technological trends.

And sure, a fair share of newer companies have entered the public mainstage. But even the most prominent newbie of the bunch, the heavily Microsoft-funded OpenAI, was founded by a gaggle of Silicon Valley vets — Sam Altman, Peter Thiel, Reid Hoffman, since-defected Elon Musk, et al — with deep tech industry ties. The same goes for ventures like Character.AI and Humane Inc., founded by ex-Google and Apple executives, respectively.

"It's not like 1999 when investors were racing to hot IPOs for companies that had no chance of making money," Edwards told the WSJ. "Today's winners are disciplined, enormous companies that have moats in place and data sets to exploit."

Still, even the most seasoned 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 relevancy in a changing technological landscape. Plus, as a general rule, a high-dollar feedback loop never feels particularly healthy, and cracks in some leading industry players are already starting to show.

As a select few dot com firms did, some AI ventures will likely stick around. But a lot of them probably won't, and given what we know about the ghosts of dot com's past, wariness — something often lost in the fog of war — is more than warranted.

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