Wim Zwanenburg: Ghost of dotcom bubble haunts AI stock rally
This column was originally written in Dutch. This is an English translation.
American tech stocks have not had a good start to the year. Comparisons with the bursting of the dotcom bubble are quick to emerge. But while there are similarities, there are also significant differences.
By Wim Zwanenburg, investment strategist at Stroeve Lemberger, written in a personal capacity
Both the recent AI stock rally and the dotcom period were characterised by enormous hype surrounding a new technology: in the 1990s, it was the internet; now, it is artificial intelligence. Speculative investors believe that these kinds of innovations will radically change the world. This euphoria then causes a rally on the stock market. During the dotcom hype, shares in internet companies rose explosively, as did the shares of Nvidia, Microsoft and other AI-related companies that are now in the spotlight. In both cases, billions of dollars flowed into companies and investors took an advance on future high profits. In such a phase, acquisitions are also made at enormous valuations that may never be recouped.
On 24 March 2000, the S&P 500 index reached a record high that was not surpassed until 2007. Three days later, the tech-heavy Nasdaq 100 index also closed at a record high, the last time in more than 15 years. After bottoming out in October 2022, the S&P 500 rose 72% to a record high in mid-February 2025, adding more than $22 trillion in market value to the index. But then sentiment reversed and stocks began to fall. The Nasdaq 100 lost more than 10% and entered correction territory, with the S&P 500 also falling to that level.
Differences
The internet bubble was largely based on loss-making start-ups, some of which benefited from the mania by adding ‘.com’ to their names, followed by an IPO and the issue of new shares. The internet was still largely experimental and many dotcom companies had little revenue at the time and lacked solid revenue models. The euphoria surrounding AI, on the other hand, is centred around a small group of technology companies that are among the most profitable and financially stable companies in the world. This year alone, Alphabet, Amazon, Meta and Microsoft are expected to invest a combined $300 billion to further develop their AI capabilities. And even with all that spending, they are still expected to generate $234 billion in combined free cash flow. In 2000, on the other hand, a huge number of companies in the top 200 in terms of market capitalisation had a negative burn rate. With AI, we see tangible applications and profitable business models, especially in the chip sector and cloud services. The adoption rate is also significantly higher. AI is now being integrated much more quickly and widely into sectors such as healthcare, marketing and software development than internet services were at the time. Nvidia has a strong market position and has often exceeded expectations with exponential profit and revenue growth. Global demand for AI, cloud computing and data centres are structural growth factors that were not present in the 1990s.
Although the AI rally showed signs of overheating, as during the dotcom hype, the fundamental basis is much stronger today. As belief in American exceptionalism has turned to fears of a negative impact from the US president's drastic policies, highly valued stocks have become quite volatile. However, technological development is continuing apace and I expect it to push AI company share prices back up again.