• Some analysts have likened the AI investing craze to the dot-com bubble.
• The explosion of interest in bots like ChatGPT has powered US stocks to massive gains.
• But today’s “Magnificent Seven” are nowhere near as overvalued as their late-1990s equivalents.

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The rise of artificial intelligence sparked a stock-market surge last year – but some naysayers were quick to liken it to the dot-com bubble of the late 1990s, which ended in a devastating crash.

That comparison has come back into focus at the start of 2024, with mega-cap tech stocks shedding hundreds of billions of dollars in market cap as traders grapple with the idea that the ChatGPT-fueled frenzy might not last.

But one key valuation metric shows it doesn't make sense to collate today's "Magnificent Seven" to their late-1990s equivalents. 

Dot-com comparisons

The Magnificent Seven – a group consisting of Apple, Microsoft, Google owner Alphabet, Amazon, Nvidia, Facebook parent Meta Platforms, and Tesla – were the main winners from the AI rally, with their stellar gains powering the Nasdaq 100 54% higher in 2023.

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That was one of the best years in the tech-heavy benchmark's history – and more skeptical analysts have compared the surge to the boom-and-bust cycle of the late 1990s.

Between 1995 and 2000, excitement about the rise of the internet led to US tech stock prices skyrocketing – but over the first two years of the 21st century, a market meltdown wiped out all of those gains, with failed companies like Pets.com and Webvan coming to symbolize investors' exuberance.

In May, Bank of America's Michael Hartnett said AI had inflated a stock-market "baby bubble", and UBS's Art Cashin warned the tech could be "a new mini version of the dot-com."

Four months later, Rebellion Research compared the share price of chipmaker Nvidia – which soared to a trillion-dollar valuation last year – to 17th-century Dutch tulip mania.

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"Investors should tread with caution," strategists said, adding that it remains to be seen how "practical and profitable" AI can actually be for listed companies.

'Magnificent 7' valuations

But one look at the current Magnificent Seven's price-to-earnings ratio demonstrates that right now, it doesn't make sense to compare AI and the dot-com bubble.

Investors use P/E ratios to compare a listed company's stock price with its earnings-per-share, in a bid to determine whether a stock is fairly valued.

In a research note published Friday, Capital Group pointed out that the tech-heavy Nasdaq 100 index currently has an average P/E ratio of about 32.5x, with the top 7 stocks making up 59% of the gauge.

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Capital Group, FactSet, Nasdaq, National Bureau of Economic Research, Refinitiv, Standard & Poor's.

At the peak of the dot-com boom, the index had a much higher P/E ratio of 80.1x, suggesting stocks were significantly more overvalued. Also, its seven largest companies in terms of market capitalization – Microsoft, Cisco, Intel, Oracle, Sun Microsystems, Worldcom, and Dell  – had a similar market share.

"In 2000, companies were overvalued to a much greater degree than the market leaders are now," Capital Group's equity portfolio manager Mark Casey said.

Microsoft, the largest Nasdaq constituent by market cap at the end of 1999, had a P/E ratio of 60.8 then. The measure was only at 29.1 when 2023 ended.

"At the top of the internet bubble, there was lots of fluff that imploded," he added. "This time around, there is less fluff, and most of the mega-cap stocks are legitimate investments."

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Casey's view echoes the outlook shared by many of Wall Street's top names in their 2024 outlooks – with Goldman Sachs' David Kostin, Bank of America's Savita Subramanian, and Deutsche Bank's Binky Chadha each predicting there's further upside left for the S&P 500, implying big tech stocks' AI-fueled rally has room to run yet.

"AI will carry on being a dominant theme in 2024 – we're kind of only scratching the surface of it at the moment," XTB research director Kathleen Brooks told Business Insider in an interview late last year. "If you're selecting stocks at all, you want to be selecting these ones."