Almost 24 years have passed since the dot-com bubble began to burst. With the Nasdaq market ending February at an all-time high, is a generative AI bubble occurring? If so, is the bubble ready to burst?
The generative AI bubble is steadily growing. Here are three reasons why the bubble isn’t ready to burst.
- The leaders of the generative AI boom are large companies, most of which are profitable.
- Many generative AI startups are being hatched, but none are publicly traded in the red.
- Unlike in the late 1990s, borrowing money to buy stocks and fund companies is not as important as it once was.
The generative AI bubble is about to burst. However, that could happen by the end of the 2020s. By then, hundreds of unprofitable startups will have gone public, a surge in consumer borrowing for acquisitions, and the widespread adoption of his Generative AI stock tip from his Uber driver, for example. You need to check for signs.
Comparison of dot com bubble and generative AI bubble
It took about five years for the dot-com bubble to burst. Meanwhile, the generative AI bubble began recently, about nine months ago. It could be years before the current bubble finally bursts.
The dot-com bubble began in August 1995 with the initial public offering of Netscape, a provider of Web browsers and related software. On March 10, 2000, the Nasdaq hit an all-time high of 5,048, up 3,896% since Netscape’s IPO.
An extensive ecosystem has emerged to support this bubble. my book, Net incomeevaluated nine different industry segments that hosted IPOs, including web portals, web consulting, web marketing, internet venture capital, web content, internet infrastructure, internet security, internet service providers, and e-commerce.
In the intervening years, hundreds of companies across all these segments were born and went public. For example, in the United States between 1996 and 2000, 2,888 companies went public. international banker.
After the dot-com bubble burst, it took more than two years for the Nasdaq to bottom. By July 2002, the Nasdaq was 75% below its March 2000 high. An astonishing 48% of the dot-com companies founded after 1996 were still in existence at the end of 2004, according to him. new york timesNew York Times.
The generative AI bubble started with the release of ChatGPT in November 2022, which quickly reached 100 million users. Chatbots received a lot of press attention, but the generative AI stock market bubble was born in May 2023 (NVIDIA’s disappointing first quarter and surprising forecast for the second quarter of 2023). ).
Since the beginning of 2023, generative AI stocks have risen more than twice as fast as the Nasdaq. In fact, my generated AI stock index is brain rush, my recent book — rose 86% in 2023 compared to 43% for the Nasdaq. In his first two months of 2024, GAISI is up his 21% and the Nasdaq is up 9%.
Generative AI also has an ecosystem. However, unlike in the dot-com era, these days none of the companies in the ecosystem are publicly traded.
Below are the generative AI industry segments (with only a few, including Nvidia) reporting revenue specifically related to generative AI, along with stock market performance in 2023 and year-to-date in 2024.
- consulting. +30% in 2023 and +7% in the first two months of 2024.
- software. +91%, +10%.
- cloud service. +70%, +10%.
- hardware. +151%, +59%.
Does this mean the generative AI bubble is ready to burst? For reference, here are two reasons from a February 2016 column I wrote about why the dot-com bubble burst. Masu.
- IPO standards are low. During the dot-com bubble, the standards for listing companies were extremely low. For example, he just remembers being appalled when he read the prospectus of Noosh, a printing service that had filed to go public with proceeds of $68,000.
- Unable to repay debt. During the dot-com bubble, fiber-optic broadband service providers borrowed billions of dollars to fund the rapid construction of networks. They lost money and were unable to raise new capital when the bubble burst and they filed for bankruptcy. Most notable is his $22.4 billion (asset) bankruptcy of Global Crossing in January 2002. Investors also borrowed large amounts of money during the dot-com bubble. “If you look at the bubbles of 1999-2000 and 2007, one of the key characteristics was investor leverage,” said Bob Parker, senior adviser at the International Capital Markets Association, an industry group. CNBC. “And we had very high levels of leverage, whether it was retail investors or institutional investors, and that was through borrowing or derivatives,” Parker added.
Given that there is neither a Generative AI IPO nor any Generative AI-related debt that needs to be repaid, the most powerful factor that could cause a rapid decline in GAISI’s value is a significant disappointment in the growth forecasts of its major companies. is.
What is causing the generative AI bubble to burst?
Here’s my assessment of how each of these factors will play out over the next few years.
- Generative AI will produce IPOs, some of which will be successful. The possibility of an IPO like the blizzard of the 1996-2000 dot-com era seems years away for generative AI. In 2023, AI startups received a lot of funding; crunch base. In 2024, the focus will shift from consumer applications to enterprise applications. However, as of January 2024, the only generative AI-related IPO expected in 2024 was Databricks, which competes with Snowflake and MongoDB. crunch base.
- Private investors are not currently borrowing large sums of money to get into the generative AI game. “Investors don’t really have much influence,” said Paul Gambles of MBMG Group. CNBC. He added: “I don’t think we’re going to see a massive market reversal like we saw in 2000. If you look at investor cash positions, money market fund positions, corporate and investor liquidity positions. , the cash position still remains.” The sides are very high. ” Parker doesn’t foresee a dramatic market crash, but he does envision investors taking money out of AI and into the broader market.
- The current GAISI leader will disappoint investors. Given the extremely rapid growth of companies like Nvida and Super Micro, investors will eventually set growth expectations higher than the companies can deliver. In fact, he said in February 2024, Snowflake’s stock price fell 20% after announcing disappointing outlooks and unexpected management changes. CNBC.
The potential demand for generative AI is in its early stages, according to interviews with executives at companies using the technology, including State Street and Freddie Mac. If investing in Generative AI helps companies reduce costs and improve employee and customer retention, they will continue to buy.
This suggests that the generative AI bubble still has a long way to go before it bursts.
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