iStock.com/Vertigo3d
May 10, 2024
Will AI Mimic the Dot-Com Bubble?
The explosion of interest in bots like ChatGPT has powered U.S. stocks to massive gains, leading to continued speculation over whether the AI investing craze may follow the path of the infamous dot-com bubble and crash of the late 1990s and early 2000s.
“Both represent transformative technological innovation that redefine industries and change societal behaviors,” Henry Nothhaft Jr., president of business consultancy EssentialDX who’s been involved in AI-based startups since 2009, told Cointelegraph. “As with the dot-com bubble, with AI, we’re experiencing a hype cycle characterized by rapid innovation, a frothy investment environment, a lot of new entrants and, I think, inflated expectations.”
The poster child of the mania is AI chip supplier Nvidia, which was trading at about $160 per share the day before ChatGPT made its public debut in November 2022 and is now trading at nearly $900 per share, according to Marketplace, becoming the third-largest U.S. company by market value.
Among the differences, the veterans of big tech dominate much of the AI enthusiasm, with the stock market’s recent rally led by the “Magnificent Seven” stocks: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla.
“It’s not like 1999 when investors were racing to hot IPOs for companies that had no chance of making money,” Mike Edwards, deputy chief investment officer of Weiss Multi-Strategy Advisers, told the Wall Street Journal. “Today’s winners are disciplined, enormous companies that have moats in place and data sets to exploit.”
Those discounting a full-fledged tech bubble arriving also note that AI is supported by tangible applications and use cases, with many companies incorporating AI into their operations and products.
In a blog entry, Lei Qiu, portfolio manager for disruptive innovation equities at investment management firm AllianceBernstein, noted that many of the mega-caps building out cloud infrastructure that supports AI are generating “substantial” revenues as clients seek productivity gains. She wrote, “Rather than anticipating the next big product — a failed tactic of the dot-com boom — today’s profitable AI stalwarts are spending on cloud infrastructure primarily to improve efficiency.”
Another difference is healthy skepticism surrounding the emerging technology. Governments across the globe, academic institutions, and even companies making AI software are studying its potential risks with a level of scrutiny that wasn’t present in the 1990s. Many investors are also believed to have taken lessons from past tech bubbles, from dot-com to crypto.
Critics question whether the technology will prove useful beyond a narrow set of tech juggernauts and ultimately fall short of projections.
“If you’re just a regular company, it’s not clear how AI is benefiting you yet,” Steve Sosnick, chief strategist at trading firm Interactive Brokers, told ABC News. “Is this helping Pepsi do their work more efficiently? Hard to say.”
“There is growing evidence that the hype machine is slowing down,” said a recent article in The Washington Post. While OpenAI, Microsoft, and Google have unveiled gaudy new products with fanfare, AI so far is “yet to upend the way people work and communicate with one another,” and profits continue to be elusive as AI tech “remains hugely expensive to build and run,” according to the Post.
As in past bubbles, hype may also periodically run ahead of the transformation the technology may ultimately deliver.
“Are we in an AI bubble? Yes,” Julie Wainwright, former CEO of Pets.com who went on to lead the RealReal and now heads an AI nutrition company, told Marketplace. “Will there be a rush to move the technology forward and companies funded that will fall by the wayside? Absolutely. But the technology’s real.”
Discussion Questions
Do you see the AI boom resembling the dot-com bubble?
What would a severe market correction in AI valuations and funding access mean for retail?
Poll
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John Lietsch
CEO/Founder, Align Business Consulting
Nicola Kinsella
SVP Global Marketing, Fluent Commerce
Jeff Sward
Founding Partner, Merchandising Metrics
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There is a lot of hype around AI, however, the technology has very real potential to transform industries, including retail. The challenge is to separate the hype from sensible applications. This is important for markets investing in companies, but it is also critical for retailers investing in the technology itself. Areas like inventory management, demand forecasting, pricing optimization, and basic customer service are all sensible areas to explore and invest in. What retailers must ensure, however, is that AI investment does not crowd out investment in other areas – including the basics of running a retail business.
Does the AI boom remind me of the Dot-Com bubble of the 1990’s? Yes, I think it does. Will AI mimic the dot-com bubble? Well, hopefully lessons were learned and it won’t. But lessons usually don’t get learned, and we have investors today who were only in diapers in the 1990’s, so I believe I will mimic the 90’s to an extent. It already has. What makes me laugh is how President Biden is taking credit for the stock market, so I guess he invented AI, much like Al Gore invented the internet in the 90’s. Ha!
There’s no denying that artificial intelligence optimism is raging on Wall Street, but let’s turn our attention to retailers.
Having met with a number of retail chain executives at NACDS Annual Meeting, it became quickly apparent that AI was near the top of their concerns, if not exactly on the top. It is fair to say there is a very wide variance in how retailers are “accepting” AI. Very, very, wide.
Some retail chains are building a brand new much larger future around AI, while others are in the early stages with mix impressions, some confusion, and even some resistance. Candidly there is a lot of misinformation in the marketplace at these early stages. I think that might be because so many different types of suppliers, vendors, and service providers all have something to say, something to sell, and something to misinform retail chains about. Not intentionally.
Back to Wall Street. About two years ago, Nvidia was trading at $160 per share the day before ChatGPT went public. A share of the AI chip supplier trades for about $860 today, making it a $2 trillion company.
Off topic, but worth repeating, the AI stocks remind me of when a buddy of my dad’s advised him in 1988 to purchase 1,000 shares of Intel at $0.70 per share, and my dad thought that was risky so he purchased much less. Meanwhile, his buddy purchased 25,000 shares for under $17,500 and when the price hit $55 his buddy cashed in and made $1.3 million.
AI is indeed compared to the birth of the internet, a revolutionary technology that could transform almost every aspect of our lives. It’s true that Wall Street was extremely enthusiastic about the internet during the 1990s. As a result of that enthusiasm, there was eventually a lot of lost money! Yeah, it all came back down to Earth.
The dot-com boom of the 1990s seemed unsustainable to those who stayed sober. Did we have signs? Well, Nasdaq, grew by about 500% in only five years.
Those were the days my friend, we thought they’d never end, but they did! – Db
This story seems to be conflating two separate issues: the inherent value of AI, and whether/not people are assessing that correctly (just as with the “dotcom bubble”, since the bursting of that bubble certainly didn’t diminish online use) As acknowleded here, there’s been a lot of AI-related hype, so there may well be unrealistically high valuations for AI stocks; but should this really matter to retailers? The Dotcom Crash was a financial crisis, not particularly a retail one (indeed, the crisis came about precisely because people had overestimated the impact of tech.)
Why do we hyper focus on the poor dot-bomb? What about the Metaverse and Crypto or the Tulips? And just wait – we’ll soon add Sober Curious and AI to the list.
All Hype Bubbles eventually burst because they are not supported by fact or reason. The hope is that the hype does not diminish the interest or the value in the underlying asset. Generative AI has value and is a great addition to management tool boxes. And, when used properly, it will prove its worth in addressing real problems and improving critical success drivers (like productivity).
As what it means for retail: nothing if the technology was properly evaluated and deployed. However, the danger is for those that deployed it for “tech’s sake” (or for “hype’s sake”) because they will not realize any benefits and sadly, may dismiss the technology as easily and ignorantly as they rushed to implement it. That could hurt or slow the overall adoption and necessary evolution of the tech.
Hey John, I think you may be conflating “hype bubbles” “speculative bubbles” and niche movements. There may be a “hype bubble” with GAI, yet there is not yet an investment or speculative bubble. Further, the cold hard facts are that GAI IS being used, is being adopted at high rates and is showing actual ROI.
This means a LOT to retail. Retail is not just merchandising and sales, retail is the entire supply chain, planning, making, buying, distributing, storing and selling.
AI is impacting all six of these retail “mega-processes”
Possibly. However, I’m bald and splitting hairs is not a luxury I can afford. I’ll grant your hair splitting on the different bubbles if you’ll grant that it’s not usual for those bubbles to appear together and move in unison (hype begets speculation begets hype). The good news is that we seem to agree on the value of the tech. I have never argued that the tech isn’t valuable and capable of everything you describe when properly deployed (as if often the case).
In a word, yes. It’s going to burst and then settle down to a more normal (albeit rapid) growth curve. The hype now is beyond insane. I’ll know we’ve made progress when chat bots are smarter and autocorrect stops picking the wrong word.
A bubble implies inflated valuations beyond true market demand. While there is definitely a lot of AI-washing and companies that are touting unsubstantiated AI capabilities, Nvidia is making real money based on real demand, and well established tech. The bubble may burst for smaller AI companies trying to cash in on the wave without a proven ROI, but I see that as a benefit for retail. Why? The market will be less crowded and the clear winners will emerge more prominently. In the meantime, there are a lot of established vendors, both very large, and smaller (but with a solid track record) that are adding AI capabilities. And a big market correction shouldn’t impact those companies too much. It’s the newer AI-only companies that may struggle with less access to capital.
Yes, this. A voice or reason and reality on the subject. Thanks Nicola.
I don’t pretend to understand the far-reaching impact of AI on internet commerce and technology in general, but I don’t think the comparison to the dot-com bubble is accurate. There were many companies rushing into e-commerce without a clear strategy or adequate capitalization, while others survived and thrived as usage exploded. (The development of the smartphone didn’t hurt, either.) While there may be some marginal players in AI that fall by the wayside, big companies like Microsoft and others will benefit from the growth of AI.
My first job (and layoff) out of university was at a dot-com whose bubble burst in late 2000.
While dot-coms were scrappy, unorthodox startups, today’s AI champions are influential tech giants. The Magnificent Seven are more aligned in their vision of productivity compared to the market fragmentation we had 25 years ago.
AI’s boom is fuelled by process efficiency and labor reallocation as workplaces evolve with automation. As case studies prove and quantify AI’s value, more retailers and brands will invest in this innovation.
Well said Lisa. Right now GENAI is dominated by the traditional “Magnificent 7” in tech. Although there are some great SMB players in the space building tools for hyper-specific use cases and industries.
You are also spot-on in your last paragraph. Efficiency, labor issues, re-globalization, new consumer journeys and, massive data integration projects fuel growth.
Retailers, of all kinds, and in all channels are figuring out where, when and why to apply GAI.
Thank you, Michael.
Maybe. The dot com bubble happened primarily because many startups did not really have a business model that was sustainable…the AI “gold rush” is more about who builds the strongest, most robust large language models, and, further, who leverages AI in a way that improves business results, either by taking costs out or increasing top line revenue opportunities.
My view, we are no where near a “dot com like” bubble here. Sure there will be some implosions, but nothing like the dot com experience.
New, bright, shiny objects can definitely create very energetic swings of the pendulum. But AI is real. AI’s abilities and opportunities to creating permanent change in business models is real. But the ability of different AI applications to create change will not be even across the board. And different businesses will have different motives and skills with which they apply AI to their individual business model. There are going to be some dramatic successes and failures, and it’s going to be hard to predict where those successes and failures will occur. So I don’t think any market corrections will be severe, but there will definitely be corrections. AI will not save or destroy any given brand or retailer. But a smart application of AI will help create distinction and differentiation over time, and that will tell the tale in the long run.
Those that are doing AI “wrappers” on existing AI platforms aren’t going to make it long term but bigger players will continue to move forward. And I think it is important to separate the financial piece from the tech piece. If you watched the Open AI announcement this morning on GPT-4o, the tech continues to advance. As someone who actually uses GPT tech, it does work and will only only continue to get better.
Not much doubt the use of AI is/will be transformative across industries and markets. What seems less certain is there will be sustainable differences between the various AI brands – ChatGPT, Google, Microsoft versions and so on – or whether AI will become generic to a large extent as it moves towards maturity.
The AI boom may well mimic the dotcom bubble bursting. If it does then we will see similar results. Speculation drops, pretenders are weeded out and then it becomes a technology that is fully integrated in every aspect of our lives, as the internet is now.