Yves. here. Perhaps those of you old enough to remember the dot.com era will beg to differ, but the dot.com bubble was a mania. Enthusiasm for all sorts of Internet-y new ventures swept across society. A non-trivial number of professionals quit well-paying, stable jobs to join a dot.com. The cool thing for graduating MBAs to do then was not to go to Wall Street, but team up with some clossmates and raise $5 million to start a new venture. All that took was a 5 page business plan. McKinsey joined the fray, setting up an incubator and giving advice in return for equity. McKinsey later suffered losses of $200 million on these stakes. And yes, I did meet more than one taxi driver who talked up his Internet stocks.
So now, as Das explains, the AI overvaluation makes its late 1990s-2000 predecessor look tame. Yet the excitement is missing. What gives?
By Satyajit Das, a former banker and author of numerous technical works on derivatives and several general titles: Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006 and 2010), Extreme Money: The Masters of the Universe and the Cult of Risk (2011) and A Banquet of Consequences (2016 and 2021). His latest book, The Everything Bubble: A Guide to the New Age of Financial Speculation and Phantom Wealth,> will be released in 2027. He has also written on ecotourism – In Search of the Pangolin (2006) (with Jade Novakovic) and Wild Quests: Journeys into Ecotourism and the Future for Animals (2024). This is a version of an extended version of a piece published in the print edition of the New Indian Express
The initial public offering of SpaceX and the forthcoming AI floatation bear similarities to the lead up to 2000 dot.com crash which resulted in losses of around $5-6 trillion. Between March 2000 and October 2000, the benchmark Nasdaq index fell around 80 percent. Public telecommunications and internet infrastructure firms, including WorldCom and Global Crossing, went bankrupt. High-profile startups, like Pets.com, Webvan, eToys.com, and Boo.com, failed. Venture capital invested in many ventures proved unrecoverable. Even survivors like Amazon, Microsoft, Cisco, Dell, and eBay, who had sufficient cash to ride out the turmoil, suffered massive falls in their share price which took years to recover.
The dot.com boom was built around the internet, its enabling infrastructure and retail and business commercialisation as applications developed beyond an academic tool. Investors with little technical knowledge piled in hoping for huge returns. Today’s focus is space and AI.
SpaceX consists of an unwieldy conglomeration of the Starlink satellite operations, a space launch business, a controversial social media service, a struggling AI venture as well as plans for orbital data centres, a moon base, and an inter-planetary colonisation program. The satellite broadband and X platforms use established technologies, but the launch business’ cost advantage is reliant on the company’s reuseable rockets which remains a work in progress. Orbiting data centres and interplanetary colonies are technically unproven. The SpaceX prospectus provided insignificant details but much technobabble – extending “the light of consciousness to the stars” and harnessing the sun “to power a truth-seeking artificial intelligence”.
While it can replace what Standard Bank CEO Bill Winters termed “lower-value human capital”, its ability for more advanced and remunerative applications remains untested.
During booms, investors allocate funds aggressively to new, promising technologies. Asset managers aggressively finance prospects with limited understanding and even less due diligence. It is a ‘throw-jelly-at-a-wall-and-hope-that-some-of-it-sticks’ approach hoping that a few successes offset the many failures. It emphasises speed to market, user acquisition and sector penetration instead of business viability and profitability. This ‘spray-and-pay’ investment approach creates, at best, overcapacity and, at worse, funding of the wrong businesses.
Signature events, primarily successful initial public offerings, are presented as proof of concept. In dot.com era, the 1995 floatation of Netscape Communications, creator of the Navigator web browser, saw its shares increase from an initial price of $28 to $75 on the first trading day. In 1999, VA Linux Systems shares priced at $30 per share rose seven-fold to over $239 upon listing. Engineered by under-pricing, massive oversubscription, and intense hype, the success ensures trading frenzy, particularly among retail investors fearful of missing the opportunity, ensuring appetite for similar investments in the sector. The listings of SpaceX, OpenAI and Anthropic are key markers in the present cycle.
The process feeds herd-like tactics and poor business models which amplifies risks and speculative excesses. Dot.com businesses pursued a rapid growth strategy to capture network effects and gain market dominance when, it was argued, they would be able to increase margins and attain profitability. They spent heavily on marketing and advertising to build brand recognition. They eschewed earlier subscription-based revenue models for advertising-supported platforms seeking to monetise high traffic volumes. Free access allowed businesses to harvest user information which could be used to target ads and influence opinions. E-commerce operations under-estimated the demands of fulfillment. Many failed to grasp the challenges of expansion, sustainable access to funding and competition.
While some lessons have been learnt, others are being repeated, especially the impact of competition. SpaceX’s mature launch revenues are underwritten by the US government. This business and Starlink face significant challenges from nationally sponsored and subsidised competitors, especially in Europe and Asia, because of increasing reluctance to outsource critical national defence and infrastructure to the US.
Lacklustre conversion of free users to subscriptions is one factor in OpenAI’s pivot away from a retail to an enterprise focus, replicating Anthropic’s strategy. But companies have balked at the cost as suppliers switch from subscription models to payment for tokens with many users now placing caps on usage. OpenAI and Anthropic’s income and growth are affected by increasing competition from cheaper, open-sourced primarily Chinese, models, the threat of regulation, and export bans because of potential AI defence and security applications. The cost of AI models themselves is growing because of scarcity of skills alongside shortages of processors, electricity supplies and water for cooling.
All these businesses have uncertain paths to profitability, with SpaceX’s filing warning: “We have a history of net losses and may not achieve profitability in the future.” As they are burning cash and have large unfunded commitments, they are highly dependent on uncertain ongoing funding access.
Valuations have decoupled from financial reality. In October 1999 shortly before the crash, the market cap of the 199 internet stocks tracked by Morgan Stanley was $450 billion against annual sales of about $21 billion and collective losses of $6.2 billion. SpaceX raised around $75 billion, based on a market valuation of $1.75 trillion or over 90 times of current revenue and 220 times earnings. To put that into perspective, a valuation of 90 times revenue means that in order to simply receive the investment back requires the firm to return to shareholders 100 percent of revenues for 90 straight years in dividends meaning zero cost of goods sold and expenses. The alternative is massive revenue growth. Goldman Sachs, one of the underwriters, expects SpaceX’s AI revenue to increase 100-fold by 2030.
Morningstar analysts valued SpaceX at less than half the offering price even using generous assumptions. OpenAI and Anthropic are expected to be valued in excess of $1 trillion, which is the new benchmark of respectability. These values are higher than those implied by the latest funding round.
Current prices are not shaped by future free cash flows but tribal affiliations and identity alongside deep, uncritical faith in a technology. On the day that SpaceX listed, an equity trader told the firm’s trading floor: “In 1969 we put a man on the moon…Now let’s go to Mars!” For many, the shares of SpaceX, perhaps more appropriately termed SpecX, were cheap on a new extra-terrestrial measure: the price-to-universe ratio.
With negative earnings and cash flow, in a reprise of 2000, values are based on unreliable indicators like “eyeballs” (unique website visitors or page views). SpaceX identified the largest actionable total addressable market in human history: $28.5 trillion. With loss-making companies currently trading at a premium to money-making firms, promoters, as in the late 1990s, do not want to be profitable as that would mean a lower valuation.
As in 2000, there is an absence of corporate governance. The imperious Elon Musk, the world’s first paper trillionaire, will control the world’s first “orbital infrastructure conglomerate” using a dual-class share structure reducing shareholder oversight and ensures that he cannot be removed. Musk’s known disregard for governance and erratic, self-dealing strategy shifts were dismissed.
As in the dot.com bubble, banks, analysts and media, despite obvious conflicts of interest, play a pivotal role amplifying the ‘new economy’ narrative. Banks involved in the SpaceX share offering received fees totalling more than $500 million. Exchanges desperate to boost the number of stocks listed agreed to include SpaceX in stock indices under expedited fast entry rules meaning investors, especially passive investors, would have to sell existing holdings to make way for SpaceX, Anthropic and OpenAI shares. Intermediaries will benefit from large trading volumes.
The real purpose of the current round of initial public offerings is to allow insiders to cash out, transferring risk to over-enthusiastic and unsuspecting investors. In 2000, once the 180-day lock-up period expired allowing original funders and employees to sell restricted shares, there were widespread sell-offs as supply flooded the market. Listing also provides founders with overvalued stock which functions as currency for financing acquisitions. Musk may merge SpaceX with Tesla consistent with previous transactions involving Solar City, Twitter, and xAI. Given his unfettered control of SpaceX, it would obviate the need for an expensive and heavily leveraged transaction to take Tesla private.
In 2000, the party ended when the US Federal Reserve raised interest rates from 4.75 to 6.5 percent to curb inflationary pressures reducing investor demand for risky investments. Investment analysts also belatedly advised clients to reduce exposure to the technology sector which they considered overvalued. Many startups found themselves running out of money with no obvious source of new capital triggering the crash. Market conditions today are remarkably similar currently with inflation rising, interest rates especially long-term bond rates under pressure, a deterioration of liquidity, and rising concern about the technology sector.
Like the dot.com episode, this too will end badly. To paraphrase historian Christian Wolmar writing about the UK railways, booms cannot be sustained on “little more than optimism feeding on itself.” While the technologies themselves may ultimately prove useful though this doubtful due to the high rate of depreciation and obsolescence of processors, few investors will earn satisfactory returns due to the difficulty in picking the right firms. That is the persistent story of every new technology.
In 2000, ordinary households who invested on the promise of a few individuals on how their technologies would change the world lost a large part of their saving. Many employees, whose was heavily weighted towards stock options that expired worthless, lost their jobs. Few founders and banks were held accountable. Given the growing anger at systems rigged against them and favouring insiders, a repeat may have a deeper fallout. The political and social consequences of a new crash may turn out to be as important as the financial effects.
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