This Ain’t Your Mother’s Internet Bubble

Just a short note for you today as we head into the long weekend.

You hear a lot about how the AI bubble is a repeat of the DotCom bubble of the late 90s.

I get the concern because there are some parallels.

The hype around AI created a frenzy of stock buying over the past two years, similar to the internet boom.  Market valuations have also gotten stretched. And massive sums have been invested in the hopes of monetizing the tech later.

But the parallels don’t run very deep.

Market valuations, while high, remain well below the peak of the DotCom era.

But the primary difference boils down to funding.

In the 90s, DotCom startups with no operating history funded their plans through IPOs. It was as much an IPO boom as it was a technology boom.

Here are the number of IPOs by year during that time:

1996: 677 IPOs

1997: 474 IPOs

1998: 281 IPOs

1999: 477 IPOs

2000: 381 IPOs

The big tech companies of today were just getting started. Amazon and Google were mere startups. Elon Musk had yet to make his first fortune off PayPal and Facebook wasn’t even an idea.

By contrast, there were 154 IPOs in 2023 and 225 last year.

Source: Stockanalysis.com 

The funding for AI is coming from successful tech companies with massive cash flows and cash hordes to invest. AI isn’t getting funding through stock issuance. And the funding doesn’t depend on ever-rising valuations.

In short, the investors behind AI have far more patience. Time is on their side. They can afford to wait and won’t pull the plug on funding should the market turn south.

The AI boom is on far more stable footing, so even when the inevitable downturn happens, it will be more correction than panic—and an opportunity to buy.

Think Free. Be Free.

Don Yocham, CFA

Managing Editor of The Capital List