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AI Revolution: 1999 Deja Vu?

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Semiconductor leader and AI juggernaut Nvidia ((NVDA - Free Report) ) reported blockbuster earnings last night that sent shares soaring higher by more than 25% today. Thursday, NVDA held gains that were enough to print fresh all-time highs.

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Image Source: Zacks Investment Research

During the earnings call, Nvidia’s iconic CEO Jensen Huang said that the company is “At the beginning of a ten-year cycle”and “A trillion dollars of installed infrastructure will transition from general-purpose to accelerated computing as companies race to apply generative AI into every product, service, and business process.”  

Beyond the glass-half-full rhetoric, NVDA provided substance in the form of fundamentals. The company beat on the top and bottom lines and raised guidance for Q2 by an astonishing $4 billion. Though Nvidia was the star of the day, other AI-related stocks such as Advanced Micro Devices ((AMD - Free Report) ), Super Micro Computers ((SMCI - Free Report) ), and Rambus ((RMBS - Free Report) ) traded in sympathy and saw substantial gains on expanding volume.

1999 Re-run?

Undoubtedly, AI is becoming a key theme for investors in 2023 and is stealing the spotlight, superseding the fear seen in the SPDR Regional Banking ETF ((KRE - Free Report) ) andbeaten-down banking stocks such as PacWest ((PACW - Free Report) ). With the recent explosion in the prices of AI stocks, expanding P/E ratios, and an influx of hype and short-term euphoria, are we heading for a repeat of the late ‘90s internet bubble?

Below are three reasons why it is too early to call AI a bubble:

Profitability: In 1999, many companies had grand ambitions but little in the way of profitability. Even early leaders such as Amazon (AMZN) were unprofitable then. Conversely, stocks at the forefront of the AI revolution, such as Microsoft (MSFT), Alphabet (GOOGL), and Nvidia, are highly profitable.

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Image Source: Zacks Investment Research

Pictured: Microsoft is highly profitable and has a low debt-to-equity ratio.

Less Frothiness: The IPO market is an excellent barometer of frothiness on Wall Street. In 1999, nearly 500 companies went public. To provide you with an idea of the scale of the bubble, stocks such as VA Linux and Globe gained more than 500% on their IPO day alone. Thus far in 2023, there have only been 65 IPOs.

Valuations are more Reasonable: Investors may get sticker shock when they see that Nvidia’s IPO is nearly triple digits. However, in 1999, search engine provider Yahoo! Saw its P/E ratio bulge to more than 1,100x EPS.

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Image Source: Zacks Investment Research

Pictured: NVDA P/E ratio.

Remember, valuations are not a useful timing tool.


Can AI stocks pull back after their explosive price moves this week? Absolutely. However, several factors that suggest that it is far too early to call the AI revolution a bubble. Remember, while there will be pullbacks and hiccups along the way, innovation can spark trends that last for years.

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