It is remarkably common to hear 50 something investment managers and strategists to compare the current AI boom to the dot com bubble. For those too young to remember - the dot com bubble burst in 2000, and the S&P 500 had three down years in a row.
There were many poster childs of excess from that period, but perhaps the best was Cisco. Everybody needed to build an online presence, and a thousand start ups were buying equipment. When the bubble burst, the starts up ended up selling their equipment, and there was a huge over hang of equipment. Cisco shares imploded.
Back in 1999, the growth in demand was driven by a surging IPO and equity issuance. That is companies were taking advantage of the high valuations to sell shares and to go buy equipment. When the market tanked, demand tanked with it. While share count of the S&P 500 has risen a bit, it is far less than in 1999/2000.
Alternatively, if I steal a chart from the internet, equity issuance is not driving the AI boom.
In fact, we know that the AI boom is being driven by relatively few companies.
We can and should throw OpenAI and Anthropic into the spenders here as well, but what we know is that these will be big numbers too. In the dot com boom, once investors tired of buying speculative IPOs the capital spigot turned off. But for the AI boom to turn off, you need the CEOs of Oracle, Microsoft, Google, Meta and Amazon to turn off the taps. How likely is that? For a company like Microsoft, and with market views on software, the questions may well be existential. For the first time in a long time, I can see a world without Microsoft in it. That is Microsoft can no long afford to not invest. And this makes it true for all the other players.
In fact the problem for the hyperscalers is that there is not a winner yet. Much like the streaming wars, they all need to spend big until a winner is set. Even though Netflix and Disney shares have been poor, they are still fighting over content. Witness the bidding war for Warner Bros Discovery.
In essence, what I am saying is the dot com bust was driven by a lot of established firms rushing into the internet without knowing what they were doing, and so equally quickly rushed out. The AI boom is being driven by companies that know what they are doing, and cannot afford to lose. I expect the spending to keep coming.
