Is the AI boom just another bubble in coms?

Does the sustainability of the AI boom in the stock market warrant investors' attention, twenty-five years after the com bubble burst?

Follow every market with TradingView The .com bubble is now a notorious case of overconfidence in the stock market. The current AI boom, according to many, is a classic example of history repeating itself. However, is this reasonable? How does the AI boom compare to or differ from the .com bubble?

Refusing to invest in the most well-liked stocks and funds is one of the hardest things about investing. A lot of people are afraid of missing out, but history has shown that this herd mentality can ultimately result in financial crisis.

There has been a chorus of skeptics questioning whether the AI boom is just another .com bubble ever since the valuations of several large tech stocks, especially the Magnificent Seven, skyrocketed following ChatGPT's public launch in November 2022. Maybe that makes sense.

On this day, March 10, 2025, the .com bubble burst for the 25th time. The Nasdaq Composite, which has increased by 24% since the year began, peaked on Friday, March 10, 2000, at 5,000 points.

But when the .com bubble burst, the index fell precipitously. It plunged to less than 3,000 points by November 2000.

According to Greg Eckel, portfolio manager at Canadian General Investments, "the prevalent belief at the time was that capturing eyeballs and subscribers would inevitably lead to riches." But without viable business plans, uncertainty reigned, and a lot of endeavors failed. Even as technology developed, the economic and infrastructure underpinnings were not prepared to sustain the exorbitant valuations.

Brad Holland, director of investment strategy at Nutmeg, says the early 2000s reminds investors of the challenges they have in valuing future innovations.

The share price of Cisco (NASDAQ:CSCO), the biggest company in the world in early 2000, dropped from just over £80 in March of that year to less than £10 by October of 2002. The stock still hasn't recovered to its pre-crash trading levels.

Because Cisco's hardware seemed essential to the global internet revolution during the .com bubble, investors purchased the company. It appeared that any company or government that wished to stay ahead of the competition would have to continue purchasing Cisco products in large quantities for the rest of time.

If that sounds familiar, it's likely due to the fact that bulls around Nvidia (NASDAQ:NVDA) make much the same argument today. Nvidia's position as the go-to stock for the artificial intelligence (AI) boom, which has helped it rise to the top of the list of the most valuable companies in the world at times, appears to be a direct parallel to Cisco's position during the .com bubble.

How do the current AI boom and the .com bubble compare to each other, and what does that tell us about the possibility of the AI bubble popping and how, when, and if it does?

Exists a bubble around AI?

Market appetite for unprofitable businesses was the defining characteristic of the tech boom of the late 1990s.

This is a constant problem for investors. It makes sense to spend comparatively large sums of money now for stock in a business that has a good chance of growing its profits in the future. That's the main goal of venture capital investing.

However, how much is too much, and how profitable should a business be before investors begin to see it as a potential growth play rather than an established business?

When Cisco was the most valuable company in the world, its stock was worth about 200 times its earnings. Investors wagered that the company's products would see increasing demand due to the unquenchable need for connectivity.

Well, they were right in a way. Cisco's net income in 2024 was £10.32 billion, almost four times its 2000 net income of £2.67 billion. That didn't, however, compensate for the stark discrepancy between its earnings and the investors' assessment of its value. After sentiment soured and networking activity dwindled, the stock fell and hasn't risen since.

In contrast, Nvidia is currently trading at about 38 times its trailing earnings and 25 times its anticipated earnings for the upcoming year. Though they are a bit higher than what most value investors would prefer, these are obviously much lower than the outrageous prices that investors gave Cisco prior to the collapse of the .com bubble.

"The financial strength of mega-cap IT companies, which are funding AI advancements with substantial free cash flows, in contrast to the debt-laden .com firms, is a critical difference in today's tech dominance," stated Dom Rizzo, portfolio manager of the T. Strategy for Global Technology Equity at Rowe Price. "This financial stability offers a more secure basis for expansion.

By the way, Nvidia's trailing price to earnings ratio has significantly decreased from its peak of 147 in April 2023. As long as earnings growth is positive, a three-figure P/E multiple is acceptable, as evidenced by the fact that its share price is higher now than it was at that time.

To put it another way, Nvidia lived up to the hype thanks to its extremely successful business plan.

However, there are signs of excitement in the market right now. Tesla (NASDAQ:TSLA) and Palantir (NASDAQ:PLTR) are two examples of companies that trade at more than 100 times their expected earnings. We know from history that if sentiment shifts against the AI boom, stocks like these could lose money.

Therefore, while we are in an AI-driven bubble, all bull markets are bubbles in some way. The question of how and when this era of stock market euphoria might end or how the AI bubble might burst is more crucial.

When is the AI bubble going to pop?

The .com bubble burst due to a number of complicated factors. The likelihood that a comparable set of circumstances will cause the AI bubble to pop anytime soon is uncertain.

One significant difference between the two periods is that interest rates are currently declining, albeit slowly, in the majority of developed economies. In contrast to what transpired in the lead-up to the .com bubble burst, that is a tailwind for growth stocks.

In contrast, valuations are also not very high. Unlike the .com bubble, when it soared past 30 and even into the high 40s, the SandP 500's average P/E ratio is now well below 30.

When reflecting on these events, which have influenced international markets and continue to haunt investors, Holland says it's critical to "gain some perspective."

When compared to March 2000, when 2G networks were common and new technologies were much less established than they are today, the hyperconnectedness of today is unrecognizable.

"Looking back, the hype surrounding companies that had not yet produced substantial shareholder value and impact had a major impact on the market excitement and get in early mentality that created the bubble.

Nevertheless, there is no reason why any current AI bubble should have to collapse like the .com bubble did. The AI bull market could end in a number of different ways.

The market was undoubtedly shaken at the beginning of the year by the emergence of DeepSeek, a Chinese generative AI start-up that seems to be able to outperform many Western AI models for a fraction of the capital and compute costs.

If Trump is successful in starting a global trade war based on tariffs, the ensuing inflationary shock may cause the stock market to reverse course.

Or, as is often the case with stock market meltdowns, the trigger might be something that takes everyone by surprise.

Investors should closely monitor the stocks' fundamentals, according to the stock market's cautionary tale. After surviving the .com bubble, strong companies like Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) are now at the forefront of the AI boom.

It simply pays to be as informed as possible about the risks associated with purchasing stocks, especially growth stocks.

See More AI.