In today’s Finshots, we tell you how the AI hype may be different from the dot com bubble.
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Now, on to today’s story.
The Story
In 2022, ChatGPT kicked off a gold rush in the world of AI, sparking dreams of a future where artificial intelligence would revolutionise everything. Tech giants jumped on the bandwagon, pouring billions into chips, data centres and all things AI.
The hype reached a fever pitch and in June this year, Nvidia, the chipmaker powering much of this AI revolution, soared past the $3 trillion market cap mark. Its shares skyrocketed nine times since 2022, even briefly surpassing Microsoft and Apple to become the world’s most valuable company.
But then, reality hit.
Just days after reaching its 2024 high, Nvidia lost a staggering trillion dollars in valuation — about 30% of its total worth. And it wasn’t just Nvidia. The whole gang of AI-heavy hitters — Microsoft, Apple, Tesla, Amazon, Meta, Alphabet, began to slide, shedding hundreds of billions of dollars in stock market value.
Panic ensued. Whispers of an AI bubble bursting began to echo, with many fearing a repeat of the infamous dot-com crash.
But is that really what’s happening? Is the AI bubble about to pop? And if it does, will it crash in the same catastrophic way the dot-com bubble did?
To answer that, let’s first understand how stock market bubbles take shape and eventually go poof.
Economic bubbles happen when the price of an asset, be it real estate, stocks or something else, rises far beyond its actual value. When investors see an industry gaining momentum, they start pouring money into it, driving prices up. This creates a bandwagon effect, with more people jumping in, convinced that prices will keep climbing. But eventually, they realise they’ve paid way too much for something that isn’t worth it. So, they start selling and the same herd mentality that drove prices up now sends them crashing down. It’s not just stocks that collapse, the industries behind them often do too.
Sounds a lot like the dot-com bubble, right? Well, yes and no because there’s a subtle but important difference.
During the dot-com bubble, companies’ stocks soared on nothing but hype, long before they had real business models.
Take e-commerce companies from that era, for example. They were selling everything online — toys, apparel and even groceries. And they invested heavily in warehouses, supply chains and even offered free deliveries to attract customers. They believed this would eventually lead to massive revenues and profits.
But the internet was just starting to take off and not enough people were online yet to support these businesses. Despite huge marketing spends, the customers didn’t come in the expected numbers and profits were non existent.
Many of these companies, like Webvan, a grocery delivery service that went public in 1999, had to file for bankruptcy. Webvan’s stock doubled on its first day of listing, giving the company a $6 billion valuation, even though it was making less than $10 in revenue per customer while spending over $27 to fulfil each order. Despite loyal customers and a great service, Webvan accumulated more than $1 billion in losses and shut down in 2001, eventually getting acquired by Amazon.
And if you haven’t noticed the difference yet, during the dot-com bubble, many companies were flying high on unreal expectations and unproven business models. They were growing fast and breaking things, but not making any money.
But with AI, the story isn’t quite the same.
The stocks that are falling now belong to tech giants like Microsoft, Apple, Tesla, Amazon, Meta, Alphabet and Nvidia — companies that have been around for a while and have poured trillions into AI. Also, demand for professionals who have completed an artificial intelligence course is skyrocketing, further solidifying AI's position as a key driver of the future economy and companies like Meta are increasingly seeking individuals with specialized skills, such as those who have pursued a master's in business analytics.
So despite these positives, why are they crashing, you ask?
Well, the reasons are more practical.
First off, investors are expecting the US Federal Reserve (Fed) to cut interest rates. You see, inflation in the US has been hovering around 3%, much lower than 2022’s 9% and closer to the Fed’s 2% target. With inflation under control, investors believe that rate cuts are on the cards.
Lower interest rates make it cheaper for smaller companies to borrow money, allowing them to expand and turn profits more quickly. So, investors are pulling their money out of big tech and moving it into smaller companies. And since these AI giants are the big players, their stocks are taking a hit.
This move also makes sense because, let’s face it, AI is a cash guzzler and it’s not going to generate massive profits anytime soon. It’s energy-intensive and demands immense computing power, both of which come at a steep cost.
To put things into perspective, it costs OpenAI close to $1 million just to run ChatGPT every day. But the revenue isn’t matching up.
A Sequoia analysis suggests that for the entire AI industry to be sustainable, it needs to pull in at least $600 billion in revenue annually. But OpenAI, the largest player in the sector, is only making about $3 billion a year. The others aren’t even close.
Yet, these companies are doubling down, planning to pump another $1 trillion into AI over the next few years. Even if the profits do come, they’re likely a decade away, when more people find AI products beyond ChatGPT that are truly worth paying for. Essentially, AI companies will need to deliver significant value over the years to get consumers to open their wallets, just like what happened with the internet.
Remember how email disrupted traditional postal services or how digital news platforms started replacing physical newspapers, bringing down distribution costs? Social media and microblogging sites decentralised the web and turned it into a money-making machine. These tech giants figured it out after the dot-com crash and AI might follow a similar path.
And that’s making investors impatient. It’s no wonder that they’re pulling back, realising it’s not worth inflating these companies’ valuations just yet.
But that doesn’t mean AI companies will pack up and leave like many did during the dot-com bust. Once they figure out how to monetize AI, the hype and the money will be back.
And that’s when investors will jump back in.
So yeah, is the AI bubble about to burst? Maybe not yet and definitely not in dot-com-style. But if it does pop someday, trust us, you won’t miss the sound.
Until then…
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