AI vs. dot-com: What investors should know
By Kyle Tetting
The rebrand is on.
Amid the cryptocurrency craze in 2018 and the dot-com bubble of the 1990s, companies went out of their way to associate their brand with the flavor of the day.
While many companies simply touted their chops as online retailers or blockchain experts (Blockchain is a foundational technology for cryptocurrency.), others went out of their way to change their names, adding “.com” to show they were hip with the times. Most recently, the emergence of artificial intelligence has driven some outsized market gains and prompted many businesses to look at positioning themselves to benefit from the craze.
Nvidia Corp., the self-touted “World Leader in Artificial Intelligence Computing,” set a record for the largest single-day market cap gain after reporting record earnings and a tripling of sales in the fourth quarter. In one day, Nvidia’s stock ballooned $276 billion in market value.
Such earnings results confirm the ripe opportunities in artificial intelligence. Nvidia CEO Jensen Huang said investment in generative AI will be in the trillions of dollars and will double the amount of data centers in five years. Local evidence of the computing power boom includes the data center Microsoft Corp. is building in Mount Pleasant, in Racine County.
While Microsoft and Nvidia stand to benefit from the rise in AI, they won’t be alone. Expect to see more businesses looking to ride the wave, either through messaging or more dramatic steps like name changes to signal their participation in the industry.
Such moves can create positive short-term price movements, as noted in a 2001 article in The Journal of Finance, but we need to remember that short-term prices tell us nothing about longer-term investments.
Many investors learned that lesson the hard way from the dot-com bubble. But lost amid any concerns of an AI bubble bursting is the reality that many dot-com companies not only survived but thrived.
They changed the way we are entertained, search for information, shop and even interact with the world around us. They’ve gone on to become the corporate behemoths now facing another technological transformation.
There’s a survivorship bias here, in that we know who survived before, and so it’s easier to point to the magic formula that made them successful. Looking back doesn’t work as well looking ahead, but there are some themes:
- The successful businesses of the dot-com era didn’t simply ride the wave, they shaped it.
- They were foundational businesses, innovators and creators, not simply bandwagoners.
For artificial intelligence, it appears likely a similar story is emerging. But in a more obvious way, this time is a bit different. The businesses likely to succeed are not only foundational to the technology, they’re also already making money. As my colleague Adam Baley put it in one of our Monday morning investment meetings, “The difference is the ‘E.’ They have earnings.”
Adam’s point is spot on. The companies at the forefront of this next technological wave already have strong and profitable businesses. In addition, many are sitting on piles of cash they can use to invest in infrastructure, research and development. That doesn’t assure success, but it helps a company survive the occasional misstep.
As we’ve already experienced another strong start to a calendar year of investing and see stock market valuations increasingly stretched, it’s tempting to assume that the bursting of another bubble is inevitable. Undoubtedly, the artificial intelligence revolution will create some winners and losers, and many businesses will fail to live up to the hype. Assuming the worst, however, overlooks just how positive the dot-com era turned out to be for some investors – and just how meaningful this next shift may be.
The key is to participate without overextending, and this is where our focus on balance has played a critical role. Balance successfully navigated the dot-com bubble not because it helped us time the market but because it helped us stick to the plan. The high-flying tech names played a small part in how we invested, but when they fell apart, bonds, value stocks and other components saved the day.
I remain a technological optimist, having weighed the immense historical gains of innovation. It’s been a foundational aspect of our economy from the beginning, and investors benefit simply by going along for the ride. It doesn’t mean there won’t be the occasional bumps in the road, but as investors, we already know the balance that is necessary to move past them.
So, while history may not repeat itself, as Mark Twain is said to have said, “it often rhymes.” When we do see businesses fail to live up to the hype, what saves us will not be that we sell at precisely the correct moment. What saves us is that we were appropriately allocated from the start.
That means relying on quality businesses, not simply businesses with growth potential. It also means, despite some challenging recent history, that bonds will play an important role in navigating whatever challenges lie ahead.
Kyle Tetting is president of Landaas & Company.
Learn more:
Implementing data, cultivating outlook, by Kyle Tetting
Changing calendar doesn’t change story, by Kyle Tetting
2023 Investment Outlook Seminar, a Money Talk Video with Bob Landaas, Kyle Tetting and Dave Sandstrom
Balance beats timing (and uncertainty), by Kyle Tetting
(initially posted March 1, 2024)
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