Learn from Last Tech Bubble to Embrace GenAI Mania

Key Points

  • We believe Generative AI (GenAI) has transformative potential. If we are right, GenAI is in the early stages of becoming an investment bubble.

  • Using the internet bubble of the 1990s as a guide, we draw lessons for today’s investors:

    • The most successful companies to emerge from tech transformations are often not the existing stars at the beginning.
    • Although a bubble will end in a bust, the mania generates capital investment that yields long-term benefits.
    • A fundamental approach with disciplined rebalancing can capture GenAI mania’s gains and mitigate risks in the bust.

Chat GPT. Co-Pilot. Gemini. DALL-E.

These are only some of the exciting new applications on everyone’s lips at business gatherings these days, where the conversation often veers to artificial intelligence, which has become the latest “new new thing.” Of course, the technology wouldn’t be at this point without decades and billions of dollars in research and development already having been spent by both academia and industry. Many types of applied AI have been used ubiquitously for so many years with enough success that we don’t even think of it as AI (though my auto-correct still can’t recognize my children’s names). Still, the most recent iteration in this field—generative AI (GenAI)—appears to be an inflection point.

“Generative AI may be the largest technology transformation since the cloud (which itself, is still in the early stages), and perhaps since the internet,” Andy Jassy, CEO of Amazon, wrote in the company’s 2023 annual shareholder letter. “The amount of societal and business benefit from the solutions that will be possible will astound us all.”1 What is already astounding investors is the performance of Nvidia stock, up 500% over the past 15 months through the end of March 2024. Currently trading at an impressive 75x trailing earnings, Nvidia has experienced EPS growth of 400% over the past year, and the analyst consensus expects EPS growth of 100% over the next year. Can such extreme growth rates continue?