Is it karma? Coincidence? Either way, the ghost of the dot-com bubble is back 25 years later.
Shares in Cisco Systems, the dot-com-era champion that became the world's most valuable company at its peak in March 2000, this week reached that level again for the first time. It's a cautionary tale of how far stock prices can depart from reality.
Bulls spend a lot of time denying that there's a 1990s-style bubble inflating again in artificial intelligence. But it's worth going through a few of the striking similarities, and some notable differences.
Valuation
There are lots of ways of valuing stocks, and pretty much all of them make U.S. shares look the most expensive since the dot-com bubble. The forward price-to-earnings ratio, price to cash flow, the "Fed model" calculation of the extra reward offered by stocks compared with bonds and the cyclically adjusted PE ratio all scream that stocks are expensive.
The reason is common to them all: Investors are, just as in 1999-2000, betting on a new technology to deliver much faster than usual profit growth. If it happens, it justifies higher valuations.
Uncertainty
Just as the dot-coms were priced based on hope that the internet would deliver a new era of profits from business models that were yet to be proven, so with AI. Generative AI has delivered chatbots and image generation that seem to be not far from magic -- but is, for now, priced well below what it costs to produce, leading to big losses at AI businesses. One difference: Many of the pure-play dot-coms didn't even have revenue, while the AI companies are at least making some sales.
Investment
The internet was built on a global network of fiber-optic cables laid by telecom companies, leading to heavy corporate spending financed by debt. The large language models behind advanced AI are built on giant data centers, leading to heavy corporate investment increasingly financed by debt, as well as by Big Tech's cash from its legacy businesses.
The numbers in 2000 were immense, with well over $100 billion being sunk into new telecom networks in the late 1990s. There was so much fiber that much of it ended up mothballed for a decade before internet traffic expanded enough to justify using it.
The race to build data centers is even more extreme, with investment figures in the trillions thrown around by leading AI developers. Spending is so large that economists say it's making up a significant share of gross domestic product growth.
Companies that sell the equivalent of picks and shovels to the gold rush have done extremely well. In 2000 it was Cisco, maker of the routers needed to connect up the internet, and the telecoms companies, where the sector boosted earnings by a quarter in the final year of the bubble. Today it's Nvidia and other chip makers supplying the processing power to the data centers and raking in profits.
Nvidia's growth is better than Cisco's was, but both were extraordinary: In 1999 Cisco's revenue expanded more than 40% and in 2000 more than 50%. Nvidia in the past two 12-month periods managed first more than 150% and then, in the 12 months to October, 60%. This growth naturally excites investors.
Single-minded market
In 1999, more stocks in the S&P 500 fell than rose. So far this year, 183, or 37%, of them are down. Anything AI-related -- chip makers, power generators, producers of equipment used to build data centers -- is up, and much of the rest of the market is down.
In 1999 if you were an internet stock, you boomed, and if you weren't, no one was interested. Much the same applies today to AI.
Retail trading
Individuals are dominating stock trading, again betting big on tiny loss-making companies. In both the 2000 bubble and the 2021 bubble in SPACs, clean tech, crypto and cannabis, loss-making small stocks far and away beat profitable small stocks, which are much less exciting.
This shows up in the Russell 2000 index of smaller companies beating the S&P 600, which requires companies to show profits before being included, by 10 percentage points in the 12 months to mid-October, before the pattern reversed. The Russell smaller gauge has beaten the S&P 600 by as much only three times before: 1999-2000, 2020-2021 and the rebound from the post-dot-com low in 2002.
The Russell Microcap index has been even more extreme, beating the S&P 600 by 25 percentage points over a year, before falling back.
This trading boom has powered Robinhood Markets up 220% this year, just as the dot-com trading boom powered E-Trade Financial, now part of Morgan Stanley, up 261% in 1999.
Bubble talk
Some say if everyone is talking about a bubble, it's a sign there isn't one. Yet bubble arguments raged in 1999 even as it continued to inflate. The same is happening now.
Exponential growth
One big difference between now and 1999-2000 is the scale of price gains. Sure, Nvidia's up a lot (really, a lot). But gains in the company's shares of 54% this year to an October peak, and 30% including the drop since then, pale in comparison to the leaps in 1999.
Cisco more than doubled in a month from mid-October 1999, while Apple was up 150% that year and Intel gained 75% in just under three months early in 2000.
Even the best big stocks this year, names such as Western Digital, Seagate and Micron Technology, only tripled or quadrupled to their peaks this week, before falling hard on Friday. In 1999, Qualcomm soared 2,620%. It took until 2020 before it recovered from the subsequent bust.
Ultimately, whether this is a bubble depends on whether it pops. If it turns out AI can't deliver both the promised productivity gains and fat profits for its creators, the parallel will be to the painful dot-com aftermath, not the boom.
