Is the AI Boom Heading for a Bust?

The dot-com bubble revisited in the age of artificial intelligence.

By William Stanton

When the internet began to take over in the 1990s, investors had never been more excited. Huge amounts of capital poured into virtually every company that promised to make money online, as everyone was eager to get in early with this new technology.

Despite record funding, many of these new “dot-com” companies struggled to generate profits, and investors began to pull their money out. The NASDAQ dropped 78% between March of 2000 and April of 2002. Some companies, such as Pets.com, Webvan, and Kozmo.com went bankrupt, while others like Amazon and Cisco survived despite massive stock price hits. As Craig Newmark, the founder of Craigslist, put it, “a lot of people who wanted to make a lot of money got too excited and hyped up the commercial aspects of the Internet prematurely.”

History shows us that when a new technology emerges, investors can get overexcited and pour in money before they know if it will deliver sustainable financial returns.

The AI Gold Rush

Many believe that we are seeing this play out today, but with today’s hottest technology: Artificial Intelligence. There is no doubt that AI has dominated economic and financial discussions in the last few years. As a result, record amounts of money are being invested into AI-related companies. A study out of Stanford reported that $252.3 billion was invested into corporate AI in 2024 alone.

Despite the hype, there is growing concern that much of this money is not generating profits any time soon. An MIT study published in July found that 95% of organizations investing in generative AI are seeing zero return. This is problematic for the future of AI stocks. If these companies continue down the trajectory they are on – investing heavily in AI without serious returns – investors will eventually pull their money out, resulting in a crash akin to the “dot-com” bust of 25 years ago, perhaps even worse.

Boom or Bust?

Private Investment in Generative AI from 2019-2023

Seven of the companies leading AI investment in the US, known as the “Magnificent 7,” account for 34% of the total market value of the S&P 500. Some of these stocks are trading at extremely high P/E ratios – a stock’s price per share divided by its earnings per share. Nvidia has a P/E ratio of 47.85, and Tesla’s is an astounding 201.12, while the S&P average is in the low 20s.

Leading AI startups like OpenAI and Anthropic are generating massive revenues, but are still nowhere close to profitability. If fears of an impending AI bubble burst – a sudden collapse in stock prices after a period of overhyped investment – prove true, it will have disastrous ramifications for the market as a whole.

That being said, two things can be true at once. AI can be the greatest technology of our time, poised to revolutionize every industry, and yet companies investing heavily in AI may still face stock crashes. The dot-com bubble did not result in the abandonment of the internet – quite the opposite. Companies that took huge stock hits but survived, like Amazon and Cisco, recovered and went on to make tens of billions. As businesses learn to implement AI more effectively, they will begin to reap the financial rewards of this revolutionary technology. It just may take longer than expected.

About the Author

Bill Stanton is a junior at Grove City pursuing a double major in Computer Science and Data Science, with minors in Artificial Intelligence and Biology. In addition to serving as a Research Fellow for the Institute for Faith & Freedom, he is Vice President of the Crimson College Investors, Social Chair of the Beta Sigma fraternity, and a Statistics Teaching Assistant for Dr. Smith.

Bill is passionate about various topics, including individual rights and freedoms, fiscal responsibility in government, and the advancement of ethical AI for the betterment of society. He aspires to honor God through a career at the intersection of science and technology.