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AI Hype vs. Dot-Com Bubble: A Reality Check

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Papercut
November 07, 2023

The tech world has been buzzing with excitement over the rapid growth and potential of generative artificial intelligence (AI). AI models like ChatGPT and DALL-E 3 have ushered in a new era of possibilities. You still got that hype from November last year in your head?

As investment in the AI industry skyrockets, questions about the sustainability of this growth and concerns about a potential bubble have arisen, reminding us of the notorious dot com bubble back in the late 90s. Are we witnessing another bubble in the works?

What Do They Share In Common?

Tech companies in the dot-com bubble and ‘AI companies’ in recent years share similarities in terms of excessive speculation and investment.

During the late 1990s, internet-based companies experienced a surge in investment due to the belief in the transformative potential of the internet, much like the current enthusiasm for AI.

⚡️Dot-com Bubble⚡️

The dot-com bubble was a stock market bubble in the late 1990s.

Between 1995 and its peak in March 2000, investments in the NASDAQ composite stock market index rose 800%, only to fall 78% from its peak by October 2002, giving up all its gains during the bubble.

In fact, many companies sought to attract attention and gain investor interest by incorporating terms like "internet," "e-commerce," or "dot-com" into their names, even though their businesses had only adopted a superficial utilization of the internet.

In both cases, investors were blinded by the staggering company valuations and rushed to pour vast amounts of capital into companies with uncertain revenue streams and profitability. Rational business analyses were overshadowed, leading to the possibility of companies with unsustainable growth models slipping through the cracks.

Source: CNN

Meanwhile, business owners were laser-focused on capturing market share and user growth, often at the expense of prioritizing building products that can truly disrupt the way that people live.

We all know plenty of businesses today calling themselves ‘AI companies’ because they plug ChatGPT into their workflows.

How Is Today’s Landscape Different From Dot-Com Bubble?

The dot-com bubble was characterized by companies with flimsy business models that lacked profitability and revenue streams. In contrast, AI has already demonstrated applications across various sectors, such as media, healthcare, finance, transportation, and education.

🧠 Read more in our Weekly Updates on how Google DeepMind AlphaFold is revolutionizing drug discovery.

AI's growth is driven by practical utility and technological advancements, and the industry is supported by tangible applications and use cases, with many companies incorporating AI into their products and operations.

This sets it apart from the dot-com era when companies were often going public prematurely, leading to volatile stock prices and the inevitable market crash.

The leading tech companies are already paying off from their early investments in AI. Microsoft is boldly embracing cloud and AI technologies, leaving its bread and butter products behind. The future appears promising, as Azure, Dynamics 365, and Microsoft Cloud consistently deliver remarkable revenue growth each quarter.

Image Source: The Motley Fool

Prospect and Challenges Of The AI Industry:

It's not all wine and roses, of course.

The future of the AI industry remains uncertain, issues such as:

  • slowdown in adoption

  • capital requirements

  • scalability

  • economic factors like a global recession

  • legal and ethical concerns

could all impact the industry's growth.

The AI industry is expected to continue its significant growth in the years to come, but it will require a balance between innovation and responsible investment to avoid the pitfalls of previous tech bubbles.