AI-Driven Spending Boom Is No Dot-Com Bust for Investors

16 April 2024

3 min read

Today’s technology boom is being driven by real efficiency gains, which is why we think comparisons with the dot-com bubble are misguided.

Artificial intelligence (AI) is creating lots of buzz, and for good reason. New forms of machine learning have the potential to ramp up productivity, and the many potential applications of AI are just now being discovered. But has market enthusiasm for the technology gone too far?

Massive spending on supercharged computing is raising concerns about a return to the dot-com bubble of the late 1990s and early 2000s, when inflated technology share prices eventually imploded. While we understand the comparisons, we believe they’re largely unfounded.

To understand why, we need to travel back in time and understand what drove the dot-com bubble.

The Dot-Com Bubble: A Lesson in Unsustainable Business Models

At the dawn of the internet era, telecom and cable providers poured billions of dollars into web infrastructure, while easy financing and investor exuberance drove tech-stock prices to new heights. But the business models needed to leverage this infrastructure weren’t fully developed, and tech-stock valuations got ahead of company fundamentals. Eventually, a long line of start-ups became overvalued, capital dried up and the bubble burst.

Some might argue that today’s build-out of AI servers harkens back to the dot-com heyday, which didn’t end well for investors. After all, by the end of 2024, more than $100 billion will have been invested in AI infrastructure by enterprises, cloud companies and governments.

But that’s where the similarities end.

AI Infrastructure Is Being Financed by Revenues—Not Speculation

Unlike many companies in the dot-com era, the mega-caps behind the current build-out of cloud infrastructure are already profitable. Substantial revenues are being generated on cloud infrastructure, from cloud application and infrastructure software to social media advertising. This is reflected in cloud capital intensity (capital expenditures as a percentage of total revenues), which has held steady because the infrastructure being built is already supported by demand (Display).

Revenues Support Cloud Infrastructure Build-Out

Bars showing relatively stable capital intensity levels since 2019

Current analysis and forecasts do not guarantee future results.
Capital intensity represents combined capital expenditures of five US mega-cap tech firms divided by AB estimates of enterprise cloud revenues generated from data centers.
As of January 31, 2024
Source: mega-cap tech firms' data and AllianceBernstein (AB)

Rather than anticipating the next big product—a failed tactic of the dot-com boom—today’s profitable AI stalwarts are spending on cloud infrastructure primarily to improve efficiency. In fact, that’s perhaps the best way to view artificial intelligence—as an efficiency driver.

AI Spending Has More Room to Run

The current spending boom is centered on building the next layer of digital infrastructure—known as “accelerated compute”—where generative AI is just one among many applications. Accelerated compute is a more efficient form of computing infrastructure that supports both AI and non-AI workloads—everything from social media–content recommendations to probabilistic targeting to drug-discovery simulations. Much of this infrastructure is cloud based. The cloud can be thought of as a utility grid for advanced computing functions—akin to the electricity grid that powers the physical world. The resulting efficiency gains—and returns on investment—are driving faster AI adoption rates than many expected.

Accelerated compute represents a new paradigm for making feasible workloads that were previously impractical. ChatGPT, an AI chatbot, estimates that it would have taken more than five years to train a 175-billion-parameter large-language model on general-purpose computing using high- end server CPUs. By contrast, using high-end server GPUs on accelerated compute, it would have taken two to four months.

And there’s still plenty of room to run. Currently, between 10 to 15 million CPUs are being shipped annually, compared with fewer than one million accelerated servers. We estimate that less than 25% of global installed computing-power capacity is accelerated, up from close to zero just two years ago.

Are Tech Stocks Overvalued?

The promise of a quantum leap in productivity is real, in our view. Yet, the adoption and application of the technology will play out over years, and it will take time for investors to identify the long-term business beneficiaries of this dramatic technology paradigm shift.

We’ve arrived at an inflection point that began in the early 1990s—a journey that has taken us from narrowband to broadband to mobile and now generative AI. Instead of comparing this stage of the technology evolution to the dot-com bubble, we believe it’s more useful to view it as an extension of Web 3.0—a vastly more efficient, decentralized internet connected by peer-to-peer networks and powered by machine learning.

In that context, we believe a good degree of market excess was already wrung out in 2022, when technology stocks fell sharply in a down market. While tech stocks have partially recovered from that shock, we don’t believe they’re as overvalued as some investors believe—and they’re certainly not at the levels seen during the dot-com era (Display).

Today’s Valuations Well Below Dot-Com-Era Levels

Nasdaq-100 Index

Lines showing that Nasdaq-100 valuations were much higher during dot-com bubble than today.

Current analysis and forecasts do not guarantee future results.
As of April 9, 2024
Source: Bloomberg and AB

Seismic technology cycles have inevitable ups and downs. But regardless of market conditions, equity investors can benefit from the return opportunities afforded by innovative disrupters. In the past, successful enablers of transformational innovation have enjoyed surprisingly large and lasting growth trajectories. So, we think companies that build differentiated competitive moats driven by AI have the potential to deliver long-term earnings growth for investors.

Today, we’re in the very early stage of a transformational digital infrastructure upgrade and product cycle. Industry trends suggest that this is not another technology bubble. With a patient and disciplined approach, we believe equity investors can identify companies with sustainable AI business models built on real profits, rather than false promise.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

About the Authors

This website is only directed at persons residing in Singapore. Persons resident in territories other than Singapore should not access this website. This website is not directed to any person in any jurisdiction where (by reason of that person's nationality, residence or otherwise) the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website. It is your responsibility to be aware of and to observe all applicable laws and regulations of any relevant jurisdiction. By accessing this website, you are representing and warranting that the applicable laws and regulations of your jurisdiction allow you to access the website, and that you have agreed to the terms of use.

This content is provided on an "AS IS" basis. No representation or warranty, whether express or implied, is made with respect to the accuracy, validity or completeness of this content, and any liability for errors or omissions in such content is expressly disclaimed. This content may contain projections and other statements regarding future events or the future financial performance of countries, regions or markets. These statements will necessarily only be predictions, and actual events or results may differ. You should make your own assessment of the relevance, accuracy and adequacy of the information provided and make such independent investigations as you may consider necessary or appropriate. Any opinion or views offered are made on a general basis and are not to be relied on as advice. The views expressed here may change at any time after the date of this publication. Accordingly, neither AB nor any of its affiliates, associates, directors, connected parties and/or employees accept any liability whatsoever for any loss, whether direct or indirect, that may arise from the use of the information or opinions provided.

AllianceBernstein (Luxembourg) S.à.r.l. is the management company of the Portfolios and has appointed AllianceBernstein (Singapore) Ltd. (Company Registration No. 199703364C) as its agent for service of process and as its Singapore representative. AllianceBernstein (Singapore) Ltd. is regulated by the Monetary Authority of Singapore. This advertisment has not been reviewed by the Monetary Authority of Singapore.

The information contained here reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed here may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice.

AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AllianceBernstein or its affiliates.

The contents of this site are general in nature, for general information only and prepared without consideration given to the specific investment objective, financial situation and particular needs of any specific person. This site contains the views and opinions of particular individuals and may not necessarily represent views expressed or reflected in other AB communications, strategies or funds. Reliance should not be placed on these views and information when making individual investment and/or strategic decisions.

Past performance, historical and current analyses, and expectations do not guarantee future results.

Investment involves risk. The information contained here reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed here may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AllianceBernsteinL.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AllianceBernstein or its affiliates.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.