Pets.com was the poster child of dotcom stupidity. They raised $300 million in a 2000 public offering, threw gazillions into marketing (sock puppet anyone?), and promptly burned through all of their cash, shipping pet food at a loss. They had minimal revenues and no path to profitability. Turns out companies can’t survive forever selling products for a loss and continually raising capital. Who knew?
eToys saw that and said, “hold my beer.” They had a market cap larger than Toys“R”Us, minimal revenues, enormous losses – and no skills. They were going to “disrupt” (because, who wasn’t?) toy retailing, but they forgot that retailing requires a tremendous amount of skill that nobody at the firm had. Like Pets.com, they went bankrupt shortly after their IPO.
I was a loan officer doing loans at ground zero (SF Bay Area) of the dotcom boom, and I watched it all with both amusement and incredulity. There were dotcom millionaires everywhere conspicuously checking stock prices, and constantly dropping dotcom cliches to make sure everyone knew they were in the know… “first-mover-advantage,” “cap raise,” “network effect,” “web-enabled,” “B2B,” “B2C,” “monetize,” exit strategy,” “clicks and mortar…” I also knew about a thousand “angel investors,” including my yard guy, plumber, and car detailer.
One of my favorite stories from the era, though, involved one of the hapless and skill-less dotcom CEOs from the era for whom one of my LOs did a loan. After his revenue-less company went bankrupt, he spent the next several years looking for a new job as a CEO because he was a CEO after all. I think, however, that he ended up settling for a job as a barista – where he no doubt tried to help his coffee shop “scale” and “get big fast.”
AI Is Different!
I share these stories because so many analysts and observers equate the AI boom with the dotcom boom. Analyst Ed Dowd has been leading this charge, insisting that the AI bubble will pop at any moment and bring the stock market down.
BUT – there is a huge difference between the dotcom boom and the AI boom: REVENUES – lots of them.
Joe Brown recently posted this extremely interesting video (this is an awesome time to live, btw, with so much free and fascinating info): The AI Bubble May Have Ended Without Popping (It’s 3 minutes at 2x and super interesting, so please watch).
Brown made two points:
- AI revenues now exceed capital expenditure depreciation (something we never saw in the dotcom era – and something that most analysts insisted was not possible now); and
- Every major bubble in history was preceded by a major expansion in the money supply (tulip bubble, Japanese stock bubble, dotcom bubble, housing bubble, NFT and SPAC bubbles post-COVID).
Brown says that AI valuations are driven by actual free-market principles, not by money printing, since there has been much less of it since COVID.
Mr. Trump’s and America’s Stock Market Obsession
What makes the AI bubble even less likely to pop (in the near term at least) is Mr. Trump’s obsession with the stock market.
America’s financialized economy is now entirely dependent on inflated stock valuations (and so are governments badly in need of capital gains revenues). The wealthy spend their gains, and that spending largely props up the economy.
Mr. Trump and his allies know this, so they will do whatever is necessary to keep stock valuations inflated, including, ironically, expanding the money supply (which always inflates stock valuations).
So, sorry, loan officers, mortgage bank owners, and agents, who are all praying for a stock market crash to bring rates down…
It might not happen soon, or at all. Or, if it does, it may not be driven by an AI bubble pop like Ed Dowd insists.
