In March 2000, at the peak of the biggest stock market bubble in history, the Nasdaq Composite Index topped out at 5,000 points. By the end of 2002, the tech-heavy index had crashed 78%. In today’s euphoric, momentum-driven market, could the same fate be unleashed on investors?
Forget fundamentals
John Templeton once famously said that “bull-markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria”. By the late 1990s, people were giving up their jobs in droves to become day traders. Making money was as easy as taking candy from a baby.
Back then companies were going public on little more than a PowerPoint presentation and slapping ‘.com’ at the end of the company name.
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But it wasn’t just non-profitable companies that reached crazy valuations; well established names did too. Back then Cisco Systems was valued at 37 times sales and had the biggest market cap. In the rush for routers and internet hardware, it was the clear leader. The parallels with Nvidia today are unnerving.
The internet was revolutionary
Out of the ashes of the dot.com crash, established names did survive and ultimately thrive. Amazon, which had crashed 97%, came back – but it would take a decade to do so.
But the stars of the internet revolution were new name, on the whole, with revolutionary business models. Meta and Alphabet pushed the internet’s evolutionary path in a completely different direction. The old darlings of Cisco and Vodafone were cast aside. To this day, neither share price has recovered.
Today, investors are betting on AI, or should I say one form of AI, large language models. The path for Nvidia, Microsoft, and the rest of the Magnificent 7 stocks is laid out right in front of them. A long tail representing trillions of dollars is there for the taking. Enter DeepSeek and maybe the future AI path is not so obvious after all.
First mover advantage
Any business school will teach you that first mover advantage provides a company with a clear competitive edge. I believe it does. But timing is important too.
History is littered with examples of companies that were at the forefront of pioneering a new technology and yet did not go on to become the eventual winner.
Xerox, through the invention of the photocopier, created the ‘office of the future’ but surrendered leadership to Canon. General Magic released an early version of a smart phone in 1994. It went bankrupt in 2002.
Xerox failed because it believed bigger photocopiers was what customers wanted. General Magic failed because dial-up modems couldn’t handle large amounts of data.
As I said, the internet did turn out to be revolutionary. But most of the early leaders were nowhere to be seen once the race had run.
I have absolutely no doubt that the promise of AI will be just as revolutionary as the internet was 25 years ago. But whether that means that Nvidia or any of the other tech giants will be at the centre of it, to me it’s simply too early to say. If investors’ bets turn out to be wrong, this bubble will undoubtedly burst.
