What the dot-com bust can tell us about today’s AI boom

Subscribe to enjoy similar stories. Twenty-five years ago this week, the Nasdaq Composite Index hit its dot-com-era peak after soaring more than 500% in five years. Its subsequent collapse was swift and brutal.

Small investors lured by a promising new technology called the internet lost fortunes. The economy stumbled. High-flying companies like Pets.com, TheGlobe.com and Webvan collapsed.

Today, some investors are worried the same cycle might be playing out when it comes to artificial intelligence. Even if that is the case—a big if—there is an important lesson for investors from the dot-com collapse: Ultimately, the early internet hype proved correct. It’s easy to understand the fear, and the echo of the dot-com boom.

Leading AI companies are valued in the tens or hundreds of billions of dollars, some of them with little prospect of generating meaningful sales. And investors are racing to give the companies still more money at ever-higher prices to build even bigger clusters of AI chips to fill out new, cavernous data centers. Yet the dot.com boom and bust showed that big bets on ambitious technologies can pay off in the long run.

The five most valuable listed companies globally—and six of the top seven—are tech companies from that era or ones that grew from seeds planted then. In other words, the dot-com bubble had elements of what some investors call “good bubbles" that fuel rapid adoption of revolutionary technology. That is opposed to “bad bubbles" in which people speculate on assets that don’t make the economy more productive—things like tulip bulbs, Beanie Babies or houses in the Arizona desert.