The artificial intelligence revolution has been one of the major stock market themes of 2024. But have AI stocks like Nvidia peaked?
The AI frenzy has reignited memories of another fast-moving tech trend: the dot-com bubble that turned into the dot-com crash. And some investors are starting to wonder whether AI investors are getting ahead of themselves, setting the stage for another tech meltdown.
A March Bank of America survey showed 40% of fund managers believed AI stocks are in a bubble, while 45% disagreed and 15% did not yet know.
Fourth Industrial Revolution
On Wall Street, Wedbush Securities analyst Dan Ives calls AI "a fourth industrial revolution" playing out.
Many investors had been skeptical, he told Investor's Business Daily.
But "when you start to see hundreds of billions of capex going toward AI, I think that's convinced many this is not a bubble," Ives said. "It's a 1995 moment, not a 1999 moment."
Ives were referring to key dates in the dot-com era. The boom was gaining momentum in 1995 after the launch of the web unleashed such trailblazing startups as Amazon and Yahoo. But the good times didn't last. Investors eventually soured on dot-com startups that raked in tens of millions of venture capital funding based on fuzzy business models. That led to the dot-com crash that began in 1999.
Now, some analysts are asking if the same thing is happening with AI.
"I think the question that's maybe out there that we don't have the answer for is: Does it result in higher sales and profitability for the companies spending boatloads of money?" Wells Fargo analyst Sameer Samana told IBD. "If it's not moving the needle concerning higher sales and higher profitability, what's it all for?"
Today's Very Different Investing World
Also making AI stocks' path forward unclear is how the investing world has fundamentally changed since the early aughts.
Ives noted how there are now a "lot smarter investors" and "retail plays a big focus, machines, algorithms."
"Any word that could be a little negative, stocks would get taken down," he said. "Those valuations you could argue have gone clearly above historical. But if you go back to the dot-com (era), I mean that was a mania."
But some things have not changed.
Wells Fargo's Samana pointed to the "fear of material underperformance," or FOMU.
"Nobody wants to miss out when you know the train is leaving the station," Samana said. "There will be times when it seems overdone. There will be times when there's a healthy dose of skepticism."
CEOs In Focus For AI Stocks
Ives carved out his own Mount Rushmore of AI. The honorees include Jensen Huang of Nvidia, Sundar Pichai of Alphabet, Alex Karp of Palantir and Lisa Su of Advanced Micro Devices.
The veteran analyst has been particularly upbeat about Nvidia, whose chips dominate the AI market. Ives calls Huang the "godfather of AI."
"It starts with the godfather of AI , Jensen and Nvidia," he said. "That's the best barometer for what demand looks like. And right now ... they essentially see demand fully baked into the model, going into late 2025."
How will the broader AI theme in the market play out? Ives says it's like putting together Rubik's cubes and finding out how different sectors from hardware to software will fit in the puzzle.
"It's not always going to be smooth," he said. "You'll have speed bumps. Companies could have softer guidance."
Lessons Learned For AI Stock Investors
So what can today's investors riding the AI stocks revolution wave glean from the dot-com era?
"These things kind of wax and wane," Samana said. "I would argue that when you're hearing a lot about them, it's usually something where, not always, but usually it means expectations are running ahead of reality."
Ives said what's important for investors is "not getting too caught up with the near-term narrative, and seeing forests through the trees."
"If things structurally change, make sure that's a reevaluation of the thesis," he said. "It's not putting on your sneakers doing victory laps."
It's only a matter of time before the megacap tech leaders hit $4 trillion market valuations, Ives argues. In other words, the AI party is just getting started.
"It's 9 p.m. in the AI party that goes to 4 a.m." he said.
