It’s hard to believe that 25 years have passed since the dotcom bubble burst. In March 2000, the euphoria surrounding internet-based companies came to a dramatic halt, leading to billions of dollars in market value being erased over the subsequent months.
As we reflect on this significant financial event, it is essential to not only draw lessons but also inspiration from the resilience and eventual rebirth of the market akin to a phoenix rising from the ashes.
The years leading up to the dotcom crash were marked by exuberance and speculative investments in internet companies, many of which had unproven business models. The collapse was inevitable, but what may not have been foreseen was the emergence of strong, innovative companies from the rubble of failed ventures.
Companies such as Google, Salesforce, and Meta either came into existence shortly after the crash or went public and have since grown into industry giants.
In many ways, there are striking parallels between the dotcom era and today's market, particularly concerning the current trends in US tech and artificial intelligence (AI) stocks.
Just as the dotcom boom was driven by excitement and speculation about the potential of the internet, today we are experiencing a similar cycle of innovation with AI. The potential of AI to transform industries is immense and, like the internet 25 years ago, it is sparking substantial investment and interest.
However, there are notable differences. During the dotcom era, many public companies were not profitable and lacked substantial revenue. Today, companies often receive private funding for longer periods, allowing them to build and grow before going public.
Examples such as Uber and OpenAI illustrate how companies now undergo a more rigorous vetting process before reaching public markets, making them arguably more proven and slightly less risky compared to their dotcom era counterparts.
Another critical aspect that aligns with the dotcom era is the focus on infrastructure investment. Back then, telecom firms overbuilt internet capacity ahead of demand, a misstep that contributed to the bubble's burst. In contrast, the current build-out of AI infrastructure is more measured, with most of the capacity being utilised efficiently. This difference is crucial for investors.
The key questions are whether demand will continue to grow and whether these investments will translate into revenue. For instance, Meta is successfully monetising its substantial investment, indicating that demand and proper implementation of infrastructure can lead to substantial returns.
This brings us to a significant difference between the two eras: the scalability and accessibility of technology. As technology becomes more powerful and accessible, the addressable market expands. AI, in particular, has the potential to make computing easier to use and more powerful, unlocking new use cases and business opportunities.
For example, there is currently no substantial market for humanoid robots, but this could become significant. Similarly, self-driving cars might become a reality by the end of this decade.
These emerging growth areas present exciting long-term opportunities for AI, as the demand is expected to grow alongside the increasing ease of use and power of the technology. This insight underpins our belief that robust growth and innovation do not cease with market upheaval but are often its offspring.
The crucial lesson for investors is to maintain a long-term perspective and perform thorough fundamental analysis. During periods of market frenzy, it is easy to dismiss entire sectors as unviable.
Yet, as the post-dotcom crash evolution demonstrated, infrastructure and innovation laid during boom periods can provide a solid foundation for future growth. Investors must identify high-potential opportunities amidst overhyped ventures, balancing scepticism with an open mind.
Innovation never stops, even in market downturns. Instead, these periods can catalyse the next big players. By recognising and nurturing genuine innovation and staying vigilant amidst market noise, investors can uncover opportunities that not only survive but thrive, leading to sustainable, long-term growth.
As we remember the 25th anniversary of the dotcom bubble, let us carry forward these lessons of resilience, rigorous analysis, and strategic risk management. The story of the dotcom era ultimately teaches us that market turbulence can metamorphose into extraordinary periods of growth and innovation.
With thoughtful investing and an eye toward the future, we can endure and capitalise on the inevitable market cycles.
Jeffrey Lin is a fund manager at M&G Investments. The views expressed above should not be taken as investment advice.