Amid sky-high valuations for big technology stocks, IAN RITCHIE asks if expectations of the AI revolution are overdone
Back in 1999, I was invited to attend a Credit Suisse investment conference in Cannes and I was happy to attend as I fancied a bit of sunshine on the Côte d’Azur. The World Wide Web had arrived in the mid nineties and by the end of that decade there was huge excitement about the opportunities for new businesses enabled by this innovative online communications technology, the so-called ‘dotcom’ web trading companies.
I was working on several web-based projects at the time and found myself in a boom time for these businesses which although on the face of it sounds good, comes with complications. On the one hand there was lots of risk capital keen to invest in web-based companies, but on the other hand the competitive valuations being discussed for such early-stage companies tended to be high.
On the face of it, a high valuation sounds positive as the founders can raise more capital and retain more of the company’s equity. But inevitably such investments comes via ‘preference’ shares which means the investor gets their money back before anyone else and, unless the founders can deliver a spectacularly good growth performance, they might often fail to reach the value required to repay more than the preference shareholders, and lose everything, including any money they have put into their startup.
So, I was shocked at the Cannes investment conference when a keynote speaker, with a straight face, said “every high growth new NASDAQ company would have to grow faster than Microsoft has managed so far, to justify their current valuation… but we still rate them all a ‘buy’”. That was the moment when I knew for sure that I was in the middle of a ‘dotcom’ bubble, and the inmates had taken over the asylum.
And it didn’t take long for the correction to arrive, the bubble began to burst in March 2000 when a host of young online companies failed to achieve the profits, or even the revenues, that had been forecast and began to go bust. The NASDAQ Composite Index, which had soared to record levels, plummeted from a high of over 5,000 in March 2000 to about 1,100 in late 2002. Billions of dollars were wiped off the market valuations.
Many companies failed and investors lost a lot of money which led to a mild recession in the early 2000s. Technology-heavy regions were hit hard, and it took many years to fully recover.
But back then, at the turn of the millennium the world’s largest companies were the likes of General Electric, ExxonMobil, Citigroup, and Walmart. Microsoft was the only technology business on the list. The bursting of the dotcom bubble taught investors the dangers of irrational exuberance and speculative investing. But that was 25 years ago, and over the years memories fade. Also, back then most of these companies weren’t substantial.
These days the biggest companies in the world, often called the ‘magnificent seven’, are all information technology businesses such as Nvidia, Google, Meta, Apple, Amazon and Microsoft, all of which are spending billions of dollars on the development and deployment of their various AI solutions.
And the result is that their valuations are sky-high. Nvidia recently reached a valuation of over $5 trillion, Microsoft and Apple over $4 trillion, and these companies now represent a dominant proportion of today’s global economy.
According to McKinsey, $7 trillion of investment in data centres will be required by 2030 to keep up with projected demand, and as a result these companies are also loading up on debt instruments, such as Meta’s recent $30 billion corporate debt offering to finance its huge new data centre in Louisiana.
Last month the Bank of England flagged the growing risk that tech stock prices pumped up by the AI boom could go bad, saying “The risk of a sharp market correction has increased,” particularly drawing attention to ”technology companies focused on Artificial Intelligence”. Christine Lagarde, the president of the European Central Bank (ECB) has expressed similar concerns.
Unlike the Bank of England and the ECB, the US Federal Reserve seems relatively relaxed about the ‘AI boom’. But there might be other reasons why it is taking a ‘no problem’ attitude.
Harvard’s Jason Furman has stated that the AI gold rush has been the only thing keeping the US economy from slipping into recession this year. Given that the Trump administration is increasingly exerting more direct influence on previously independent institutions such as the Fed, it might well be that any actions designed to calm the stock market boom might not be particularly acceptable to the White House.
In short, while the blinkers might be firmly on, there are signs of trouble ahead.
A leading tech analyst, Surinder Thind, recently reported after Gartner’s 2025 IT Symposium “a disconnect between business leaders’ expectations of what AI can do, and reality”, and the Massachusetts Institute of Technology recently issued research that 95% of organisations were getting zero returns from their AI investments.
And there are indications that investors are also getting nervous. Last week the magnificent seven had their worst week since April’s ‘liberation day’ as investors have become worried about the sky-high valuations and the increase of reliance on debt and almost $1 trillion was wiped off the value of the largest US technology firms.
So, is last week’s correction comparable to the first stumble of the ‘dotcom’ bubble back in March 2000, or, alternatively, is it just a small bump in the road towards the glorious AI future?
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