For the youthful princes of artificial intelligence the dotcom bubble is ancient history. OpenAI’s boss Sam Altman was a 14-year-old boy at school in Missouri when the extraordinary boom in technology shares suddenly turned to bust in March 2000.
But that devastating episode in financial markets history was clearly in his thoughts nine days ago when asked about the remarkable growth in AI company shares in recent months.
“Are we in a phase where investors as a whole are overexcited about AI? My opinion is yes,” Altman said. AI would still create tremendous value for society, and fortunes for some, but: “I do think some investors are likely to get very burnt here, and that sucks.”
Just as in the dotcom bubble of 1998- 2000, which was also known as the TMT boom (technology, media and telecoms), people were now getting “overexcited about a kernel of truth”, he said.
It was a big moment. OpenAI is behind ChatGPT, the pioneering AI platform used by 700 million people a week. Altman is the AI genius regarded as so irreplaceable he was rehired by OpenAI three days after it sacked him in 2023 and has been a prominent cheerleader for the technology.
The comments turned out to be the first wobble in a trio of sobering events for the sector. On Monday came a report from the Massachusetts Institute of Technology which found that 95 per cent of attempts to harness AI by companies so far had delivered little or no benefit to the profit-and-loss account.
Then on Thursday came a warning from another high priest of the AI world, Mustafa Suleyman, who was cofounder of Deepmind and now heads the AI division of Microsoft. AI was becoming so human-like that people were suffering from delusions and what he called “AI psychosis” and that could have dire consequences, he warned. He said safeguards were urgently needed.
AI-linked stocks have taken a modest hit over the past few days. Until the boost to markets from the Fed chairman Jerome Powell late yesterday, Nvidia, the AI chipmaker whose rocketing share price has made it the world’s most valuable company, had fallen by 3.6 per cent since Altman’s remarks.
Palantir Technologies, another AI darling, was down by 15.3 per cent. Broadcom, a chipmaker and another company seen as an easy way of getting AI exposure, fell 6.3 per cent. Advanced Micro Devices was down 11 per cent and Astera Labs down 8.3 per cent. In the UK, the Legal & General AI ETF, a fund enabling retail investors to take a punt on AI, was down 1.4 per cent.
These are not huge moves by the volatile standards of technology stocks but they do in some cases signal a very slight cooling of the buoyant mood in the four months since President Trump’s liberation day tariffs shock.
Ed Monk, associate director at the fund manager Fidelity International, described the movements as a stumble, adding: “Few doubt that AI will revolutionise many aspects of daily life but that doesn’t mean we know exactly how, and when, that change will play out.”
In particular, interest rates staying higher for longer could upset the calculations because of the way that erodes the present-day value of potential profits from AI only expected years in the future, he warned.
The consensus mood, however, is still very positive for companies providing the chips and software but also for all companies harnessing the technology to drive down costs and boost revenues.
It was only last week that Sebastian Siemiatkowski, founder of the credit group Klarna, made the remarkable claim that because of AI his revenue per employee had soared from $369,000 two years ago to more than $1 million today, alongside a 1,600 jobs cut.
That kind of cost reduction could be replicated across large chunks of commerce, according to fans of AI. Morgan Stanley said this week that corporate adoption of AI “has the capacity to reshape the future of work” and it put an eye-catching number on the net benefits: $920 billion per year.
That, it said, would translate into $13 trillion to $16 trillion of total value creation for the 500 companies in the S&P 500 alone, a boost of 24 to 29 per cent to its aggregate market value.
New technologies have always dazzled investors but the advent of the internet in the 1990s trumped them all. Selling to customers through a computer screen captured the imagination.
The prices of mainstream telecoms and media companies started to rise from 1995 as investors saw the potential to do so much more digitally.
Conventional firms that added the suffix .com to their names found that their valuations doubled or more.
Trillions of dollars were diverted to “new economy” stocks. The mania was at its most intense for stocks such as Pets.com in the US and the discount holidays site lastminute.com and the fashion retailer boo.com in the UK.
Then came the reckoning. From early 2000 onwards, doubts crept in about the credibility of those valuations.
The dotcoms were burning through cash while hopes of them making any profit were still years away.
Markets tanked, with dotcoms widely failing after they burnt through any remaining cash and more substantial TMT stocks tumbled too. BT, which was trading at about the £3 mark in 1997, peaked at more than £10, only to crash all the way back down again to below £3 in 2021. Vodafone was briefly Britain’s biggest company by market value. The FTSE 100 doubled in the three years to 2000, only to retrace all those gains by 2003. It would take another 12 years to reach those heights again. The experience of the US tech market, Nasdaq, was even more extreme, on the way up and the way down.
As for Lastminute, it ended up as a disappointment for investors, floated at 380p a share to 200,000 small investors, sinking to 17p, and was eventually taken private five years later for 165p.
Boo.com’s ending was even more ignominious.
Rich investors ranging from Goldman Sachs and the French billionaire Bernard Arnault and the Benetton family had been persuaded to pony up £100 million to back the business. It soared to a valuation of £250 million before crashing in May 2020 owing £178 million, with net assets of £1.4 million.
The rise in AI-related stocks has some of the same parallels. The internet did indeed change the world — and produced fabulous wealth for a few, such as Amazon and Google-owning Alphabet — but much less quickly than optimistic futurologists supposed.
Laith Khalaf, an analyst at AJ Bell, said: “There are definite parallels, though things were more extreme then.
Back in the Nineties, you had companies coming to market that were not much more than an idea scribbled on the back of a fag packet.”
Then, as now, stock market valuations moved into unusually stretched territory, he added. The so-called Cape ratio (standing for cyclically adjusted price earnings), a measure of how pricey stocks are relative to actual profits, is now at 37.9.
As long ago as March 2024 Jeremy Grantham, the retired founder of the asset manager GMO and a keen chronicler of bubbles, one who long ago correctly predicted the dotcom bust, was calling AI “a bubble within a bubble”.
Since then the Nasdaq is up by another 29 per cent and Nvidia up another 87 per cent.
The next test for AI sentiment could be as early as next Wednesday, when Nvidia reports second-quarter revenues, which are predicted to be $46 billion.
Where the numbers actually come in could determine whether the recent wobble gets amplified, or AI returns to an upward trajectory.
No comments:
Post a Comment