Is AI The New Dot-com Craze?

AI has been around in various forms for more than 50 years. Think language translators, facial recognition, Deep Blue (the chess-playing computer that beat world champion Garry Kasparov), autonomous cars, SIRI and Alexa, and everyone’s favorite: automated customer service phone lines!

Lately, the AI surf is up. Nvidia is the most recent company to capture the AI imagination of investors pushing its stock price up 160% since the first of the year. And Nvidia is not alone in trying to catch the wave.

On their most recent earnings calls, Meta, Alphabet, Microsoft, and Amazon mentioned "AI" a combined 168 times. More broadly, the technology-heavy Nasdaq Composite Index is having its best calendar year start since 1991.

Are we finally on the precipice of an AI revolution, driving leaps in innovation, exponential productivity growth, and if history is a guide, astronomical stock prices?

Since we can’t actually peer into the future, maybe we can get a sense of what might be ahead by looking back.

After all, one thing is for sure, human nature is remarkably consistent.

The Dot-Com Bubble

The dot-com era saw a rapid rise in technology stock valuations that drove the bull market during the 1990s. It was fueled by entrepreneurs and speculators looking to capitalize on a burgeoning and relatively new technology, the internet. In January 1992, the Nasdaq Composite Index was at a level of 580. In March 2000, it peaked at 5,100 an almost nine-fold increase of 879% in less than 9 years.

Throughout the 90s, internet companies were forming at a rapid pace and quickly selling shares through an Initial Public Offering (IPO). Stock prices were then bid up thanks to the excitement and promise that this new technology and industry appeared to deliver.

During 1999-2000, 892 companies had IPOs in the United States, a majority were technology-related. That’s an average of two new companies every single trading day for two straight years.

One of the earliest of the large internet companies was theGlobe.com (a nascent social media site that planned to make money from advertisers). Its IPO was on November 13, 1998, with the initial offering price set at $9 per share. On its first day of trading, the stock rocketed up 977% to $97 before pulling back and closing the day up ‘only’ 605% at $63.50.

Speculators didn’t seem to mind that although theGlobe.com had a plan to make money, it had no actual revenue. Within 13 months, however, the lack of underlying fundamentals finally caught the market’s attention and theGlobe.com shares fell from $97 to less than 10 cents.

Everyone Loves A Good Story

Somewhere in the middle of all these IPOs, an investment banker quipped to me that it was good if a potential IPO company was not profitable and even better if it had zero revenue. That way, it couldn’t be evaluated on traditional fundamental benchmarks, such as earnings per share, revenue per share, etc., and consequently can be bestowed with a lofty ‘internet valuation.’

The promise of a ‘great idea’ and a compelling story, coupled with no underlying fundamentals was the road map to selling stock to the investing public at excessively high valuations and raising large amounts of capital for the company. It worked and the rush was on.

Anyone with an idea on the back of a cocktail napkin and a cool company name which usually included ‘.com’ could seemingly sell shares at will and grab money from eager speculators.

In short order we saw Flooz.com, Pets.com, DrugStore.com, Garden.com, Webvan.com, and eToys.com, to name just a few of the hundreds of companies that were born during the craze.

What’s In A Name?

Apparently, a lot. A 2001 study by a group of Purdue University researchers found that 95 existing companies that rebranded by adding “.com”, “.net” or “internet” to their names, saw their share price increase by an average of 74% in the 10 days surrounding the announcement day. Ten of the companies had a core business that was not even internet related.

My personal favorite, Kozmo.com (no relation) didn’t even make it to its planned IPO. It was founded in 1998 and quickly raised $250 million from private investors (including $60 million from Amazon) on the promise of a one-hour internet-based delivery service for small purchases.

Kozmo.com couldn’t deliver (pun intended). It burned through all its cash and closed up shop in early 2001, just three years after its founding.

What Goes Up…

Eventually, market participants remembered that trees don’t reach the sky and business fundamentals matter. A company cannot grow at an ever-accelerating rate, and its growth will not go on forever. Not all dot-coms failed, but all took a hit as the bubble burst and the Nasdaq fell almost 80% over the ensuing two years to a low in October of 2002.

Those dot-coms that adapted, refocused on core business fundamentals, and delivered quality products and services not only survived but continue to thrive today (e.g., Amazon, eBay). But for every company that managed to carry on, dozens of others like Kozmo.com and theGlobe.com imploded and filled the dot-com graveyard, wiping out some $5 trillion in market capitalization from the Nasdaq’s peak.

An Interesting Post-Mortem

After the internet bubble bust of the early 2000s, companies were again similarly quick to change names—this time by dropping the dot-com moniker and the negative stigma it had come to convey.

A prime example: In 1998, Mecklermedia changed its name to Internet.com. Three years later, Internet.com became INTMedia Group with its CEO pointing out “It’s window dressing for the financial community.” On the news of this second name change, the company’s stock price jumped 54%.

Dot-ai Has Arrived

Our goal with better understanding the past is not to predict the future but to see the present with clear eyes. AI is a compelling storyline right now. And bold stories garner attention, attract money, and often, drive-up stock valuations indiscriminately.

Here is just a sample of the many companies that are hoping to cash in on the hot AI industry while also playing the latest iteration of the name game: Suki.ai, Pony.ai, Sherpa.ai, OpenAI, Swim.Ai, People.ai, Copy.ai, C3.ai, Iris.ai, PathAI, Viz.ai, Involve.ai, H2O.ai, Clarifai, AIBrain, and the clever, AEye.ai.

Being Early Isn’t Always A Good Thing

AI may very well prove to be a “change the world” technological advancement whose time has come.

But investors need to remain mindful of company fundamentals, and cautious of blindly following a fluffy narrative and the crowd to dizzying heights. Like the transformative innovations that came before, not all companies or investors early to the party are the ones who achieve long-term gains.

Stock picking still entails the daunting task of identifying the select list of companies that will prosper with your investment—Kozmo.ai anyone?

As always, invest often and wisely. Thank you for reading.

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The content is for informational purposes only. It is not intended to be nor should it be construed as legal, tax, investment, financial, or other advice. It is merely my own random thoughts.