The AI Craze is Nothing Like the Dot Com Bubble, Here’s Why

AI is starting to seem like the next big trend, with VCs pumping unbelievable sums into these companies because of the fact that this is the sort of thing that could potentially end up getting them in on the ground floor. However, this has happened at least once before in the 1990s, and it led the Dot Com bubble bursting which sent countless companies into bankruptcy and led to untold financial losses with all things having been considered and taken into account.

In spite of the fact that this is the case, there are certain things that make the AI craze seem rather different from the Dot Com bubble. For starters, stock valuations are about half what they were during the Dot Com bubble, coming in 26.4 times the forward P/E ratio of the Nasdaq 100 as opposed to 60.1x times. What this basically means is that the valuations are far more realistic, making the chances of them being overvalued far lower than might have been the case otherwise.

There is a lot more trepidation among investors, with many of them being quite cautious about the amount of capital that they put into this sector. With all of that having been said and now out of the way, it is important to note that equity flows into tech increased by 76% the year of the Dot Com bubble, reaching a whopping $352 billion by the year 2000.

The situation in the realm of AI couldn’t be more different, with equity flows dipping into negatives for the past two years. The interesting thing to mention here is that the companies receiving investments are also quite a bit more mature than the ones during the Dot Com bubble, when the median company age was around four to five years during 1999 and 2000.

As for AI companies, they’re between 12 to 15 years old which is a heartening sign since it indicates that they have had more time to optimize their processes and aren’t just being valuated based on recent performance. All these indicators seem to suggest that AI is being treated carefully and that there is a low level of likelihood that there might be a bubble which would burst at some point or another in the near future, although there might be other unforeseen factors at play.

AI's surge, akin to the Dot Com era, sees cautious investor behavior and realistic valuations, mitigating bubble concerns.

H/T: NewyorklifeinvestmentsVisualcapitalist

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