AI Bubble Warnings May Be Unfounded, Contrarian View Argues

As warnings of an AI bubble spread from Wall Street to the Bank of England, some investors are crying wolf. The current setup is different from the dot-com crash of 2000, according to a contrarian view.

The AI industry has indeed grown rapidly, with around 40% of the US stock market comprised of AI stocks. Moreover, it has swallowed roughly 80% of all US venture capital in a quarter, posing genuine risks due to concentration. However, this is not 1999: today's biggest companies trade at approximately 26 times earnings compared to 66 times during the dot-com peak.

The comparison between AI and the dot-com era is often misleading. Only about 14% of dot-com companies were profitable in 2000, whereas today's AI leaders boast margins above 50%. The biggest difference lies in revenue: hundreds of billions in real revenue are being generated by these companies, with demand outrunning supply.

A crucial lesson from history is that even a revolutionary technology like the internet did not save every stock. In fact, some stocks plummeted before eventually thriving, such as Amazon, which fell 90% on its way to conquering the world.