AI Stocks Aren’t Winners by Default
When looking at the markets recently, it has been hard not to see parallels with the dot-com boom…
It’s a textbook example of a sector “Melt Up” – a dramatic surge higher.
These periods produce rapid and sometimes irrational price increases for stocks in particular sectors. And the tailwinds can come from a mix of speculation and hype.
The dot-com boom happened early in my career. I remember it as the Wild West…
The boom began in 1995. Back then, the tech-heavy Nasdaq Composite Index sat around 750. By March 2000, it had soared to more than 5,000.
That’s a roughly sixfold gain in just five years. And some individual dot-com companies made even more incredible moves.
Back then, the rapid adoption of the Internet was on fire. And the promise of a digital revolution drove tech stocks to lofty heights.
Companies like Amazon (AMZN) saw their valuations soar…
The company started in 1994 as an online bookseller. It went public in 1997 amid the dot-com boom at a split-adjusted $0.075 per share.
By mid-December 1999, the stock had soared to a split-adjusted $5.33. It kept moving higher because of the belief that e-commerce would fundamentally change retail.
As we all now know, that’s what eventually happened. And Amazon survived the ultimate bursting of the dot-com bubble. Today, it’s a nearly $2 trillion tech behemoth.
Meanwhile, Pets.com sat on the other end of the dot-com spectrum…
The online pet-supply retailer is the poster child of excess during that era. It went public in February 2000 and raised a whopping $82.5 million.
But despite its famous sock-puppet mascot and extensive marketing, Pets.com failed.
All the extra attention helped boost sales. However, the company never managed to turn a profit. Pets.com went out of business nine months after going public.
My point is simple…
A broader Melt Up can drive even fundamentally weak companies to temporary heights.
Today, the excitement around artificial intelligence (“AI”) reminds me of the dot-com boom…
It’s hard to escape AI in the financial media these days. It has been one of the big trends recently. And the Melt Up train looks like it left the station for this sector.
Just consider tech juggernaut Nvidia (NVDA)…
The company is known for its graphics processing units. They’re crucial for AI computations. And the market knows it…
Sure, Nvidia’s stock price has pulled back in recent weeks along with tech in general. But it’s still up more than 1,000% in the past four years alone. The company’s AI technology puts it at the forefront of this Melt Up sector.
More companies are putting money to work in AI research and deployment. That means more demand for all the hardware and software required to make AI run.
Technology innovations like AI that disrupt traditional industries are the top reason we see sector Melt Ups happen. That’s part of what drives the speculative interest.
Market sentiment creates positive moves for stocks in a Melt Up sector. Meanwhile, media hype and influential endorsements are other catalysts for huge price moves higher.
It attracts a lot of the so-called “smart money” on Wall Street, too. An influx of capital from institutional investors can boost a sector’s valuation.
In the end, I believe the AI boom will turn out a lot like the dot-com boom…
Some companies will end up as long-term winners – like Amazon back then. But others caught up in the sector Melt Up will inevitably crash out – like Pets.com.
So remember, AI stocks aren’t winners by default. You need something more than just the broad theme by your side.
For me, that something more is the Power Gauge.
Sure, the recent “tech wreck” is spreading fear into investors’ minds. But that certainly doesn’t mean there won’t still be investing opportunities with AI. Here at Chaikin Analytics, I’ll use the Power Gauge to find them.
And with the lessons of the dot-com Melt Up in mind, that means not blindly piling in on every AI-related stock you see.
Good investing,
Pete Carmasino
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