The recent rise of generative AI and the subsequent rally in tech stocks has some veteran investors seeing a repeat of the dot-com bubble of the late ’90s, when Internet-era hype triggered a severe boom-bust cycle in stock prices. I am concerned that this may be the case. . But Mark Cuban, the billionaire entrepreneur who made most of his $7 billion fortune while the dot-com bubble was inflating, said he doesn’t see any similarities to that volatile era. .
“We are not in a technology bubble and when it comes to similarities, [to the dot-com era] Go…there’s nothing,” he said. told Fortune on mail.
Cuban, who is perhaps best known as the former majority and current minority owner of the Dallas Mavericks, has certainly proven over the years that he is a good reader of the market and the froth of the tech industry.as luck‘s Devin Leonard detailed in a 2007 article that Cuban sold two companies in the 1990s, and that his timing was excellent in both cases.
Early that decade, at just 32 years old, Cuban became a millionaire by selling his hardware and software sales and installation company, MicroSolutions, to CompuServe for $6 million. The sale occurred just before computer prices plummeted in 1991 due to an industry price war.
Five years later, Cuban and his partner Todd Wagner started an Internet radio company called Audionet that planned to broadcast sports games. The company later added streaming his videos and took on the name Broadcast.com, making it a darling of the Internet age. Wagner said. luck In 2007, he told how he and Cuban used the rapid technological advances and hype of the Internet era to land a big deal with the then-dominant tech giant Yahoo. “We went to Yahoo and AOL, both of whom we knew very well, and said, ‘Either you buy us or we’re going to take you back,'” he said.
Their strategy worked, and Broadcast.com was eventually sold to Yahoo for $5.7 billion in 1999, just before the dot-com bust the following year. But the problem is, in 2024, we won’t see the bubble-like developments that prevailed in today’s dot-com era, Cuban said.
Stock markets lack key characteristics of bubbles
Despite being weighed down by rising interest rates and stubborn inflation, the S&P 500 index has risen 27% over the past 12 months, topping a record high of over 5,000. And with Wall Street calling the rollout of generative AI applications like OpenAI’s ChatGPT a modern-day “gold rush” for investors, the Nasdaq Composite Index, which is typically heavy in tech stocks sensitive to rising interest rates, soared 38%.
But while Cuban just released a masterclass detailing some top tips for entrepreneurs in the AI era, we haven’t seen much of the dot-com era features despite the recent stock rally. “I haven’t seen anything ridiculous,” he said. Companies go public or raise capital. ”
He notes that the venture capital industry, which typically sees explosive growth during market bubbles, has been quiet over the past year.as luckIn 2021, when interest rates were low and tech stocks were soaring, nearly 600 privately-owned “unicorns” were created with valuations of more than $1 billion, according to a report by Jessica Matthews of . However, despite the AI hype, only 71 companies achieved unicorn status in 2023.
The IPO market, which typically booms during stock market bubbles, has similarly slumped over the past year. A record 397 companies went public in 2021, compared with just 153 companies that went public last year, according to EY.
Many Wall Street analysts also reject the dot-com bubble narrative. Dan Ives, a tech analyst at Wedbush, argued in a note Friday that the current market does not give “very high” valuations to companies with weak balance sheets and questionable business models. did. Rather, the winners in the AI era have been companies like semiconductor giant NVIDIA that have proven their ability to generate more than healthy profits. “As someone who covered tech stocks during the dot-com bubble/bust, we believe this is a far cry from what happened in 1999-2000,” Ives wrote.
Still, questions remain about the dominance of the tech sector and even the optimistic valuations of big tech companies, which certainly harken back to the dot-com era.
Market concentration remains a concern
In 1999, the tech sector accounted for a record 33% of the S&P 500, as valuations of tech companies soared based on the hype surrounding the Internet. Similarly, according to US Bank Wealth Management, today the tech sector makes up about 29% of his S&P 500. .
However, market concentration in the AI era is not limited to the technology sector. As big tech companies like Nvidia, Microsoft, and Google benefit from the generated AI hype, the top 10 largest US companies are starting to dominate the market, accounting for more than 30% of the S&P 500. I am. These giant corporations are also contributing. This corresponds to approximately 70% of the index increase rate in 2023.
Maxime Dalmette, senior U.S. economist at Allianz Trade, said in a Feb. 8 note that this concentration in tech, especially big tech, could be a serious market risk this year. “It highlights our dependence on a small number of companies.” “Company”.
JPMorgan quantitative strategists even warned in late January that the dominance of the top 10 stocks in the U.S. market was becoming reminiscent of the dot-com bubble (at the time, these companies were ranked 609th in the MSCI USA Index). (accounted for 33.2%). US large- and mid-cap companies.
“The key takeaway is that hyper-concentrated markets in 2024 pose clear and present risks to the stock market,” they wrote in a note to clients. bloomberg. “Just as a very limited number of stocks were responsible for most of MSCI USA’s rise, a drawdown in the top 10 stocks could take the stock market down with it.”
the cuban said luck Ignoring other comparisons to the dot-com era, he believes market concentration is really the only risk. “Much of the market’s wealth is tied up in seven companies. All compete at some level. Therefore, risks exist for these companies that can impact the overall market,” he warned. did.