Many experts, citing traditional market indicators, warn against overvaluing shares of AI-related companies. Nevertheless, some analysts emphasize that the current technological revolution stands out from previous periods of increased speculation. Today, artificial intelligence companies are better prepared and achieve higher profits than their predecessors during the dot-com bubble.
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It is also worth paying attention to the psychological argument. Frequent conversations about the risk of a bubble may make investors more aware of the threats and better prepared for possible market turbulence. So far, experienced Wall Street players have not decided to clearly announce a speculative bubble in the AI market.
Increased profits and financial stability of companies from the AI sector
Stock strategists from Morgan Stanley and Goldman Sachs published detailed analyzes this week that shed new light on the condition of technology companies. According to their research, when company valuations are adjusted for alternative financial metrics, the similarities to the 1999 dot-com bubble become less pronounced.
Morgan Stanley notes that the median free cash flow rate among the top 500 companies is now three times higher than it was in the late 1990s. Additionally, the traditional price-to-earnings ratio, adjusted for profit margins, shows that current valuations are significantly lower than they were in 1999, and margins remain stable.
Goldman Sachs provides an alternative valuation metric that takes into account future earnings growth. Their analyzes show that shares of technology companies are now cheaper than during the dot-com bubble and are not so detached from the rest of the market. The strength of the largest AI companies' balance sheets is also a key factor – they have less debt and more cash for reinvestment than their predecessors from two decades ago.
Morgan Stanley emphasizes that generating free cash flow, operational efficiency and high profitability are the features that distinguish the current quality index from the late 1990s. The bank adds that the expected financial results and macroeconomic environment in 2026 are favorable to current company valuations.
Growing business activity and risks for the AI market
Recently, the artificial intelligence sector has been recording a dynamic increase in business activity. An example is OpenAI, which this year allocated $1 trillion (EUR 865.5 billion) for computer contracts with companies such as Nvidia and AMD. Such actions are drawing criticism from people who fear that the closed nature of the semiconductor supply chain could pose a threat to the market.
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Some commentators point out that vendor financing was also common during the dot-com bubble, leading to an artificial increase in demand. However, Bank of America analysts led by Vivek Arya say that current concerns about AI financing are overblown, as they are likely to account for only five to ten percent of the $1.2 trillion (trillion euros) expected to be spent annually by 2020.
