Dear Client, Partner, Prospective Client,
One of the questions we have been receiving most often lately is whether today’s Artificial Intelligence (AI) boom resembles the Dot-Com Bubble of 2000-2001. It is a fair question. Many investors remember the excitement surrounding the internet, followed by the painful collapse that wiped out years of gains. While there are certainly similarities between then and now, we believe there are also some very important differences that should give long-term investors perspective.
The similarities are easy to see. Just as investors believed “the internet changes everything” in the late 1990s, today’s narrative is that “AI changes everything.” Stock prices of many technology companies have risen dramatically, valuations for some AI-related businesses have become stretched, and there is no shortage of media attention surrounding the industry. As with every major technological breakthrough, excitement can sometimes get ahead of fundamentals. Markets have a tendency to overreact in both directions, and periods of heightened optimism are often followed by increased volatility.
The biggest difference, however, is that the leaders of today’s AI revolution are generating substantial earnings and cash flow. During the Dot-Com era, many of the market’s favorite companies had little or no profits and were valued almost entirely on future expectations. Today, companies like Nvidia, Microsoft, Apple, Alphabet, Meta and others are producing billions of dollars in annual profits while investing heavily in AI development. For example, Cisco traded at nearly 200 times earnings during the height of the Dot-Com Bubble. Today, Nvidia trades at roughly 30 times earnings despite extraordinary revenue growth and industry-leading profit margins. Valuations today are elevated, but they are not nearly as disconnected from reality as they were twenty-five years ago.
Another major difference is that the infrastructure is already being built. The internet boom promised a digital future that still required significant investment before it could become reality. Today, Microsoft, Amazon, Alphabet and Meta are collectively investing more than $300 billion into AI infrastructure through data centers, semiconductor chips, networking equipment and power generation. These are real assets supporting real businesses with measurable demand. Unlike many companies during the Dot-Com era, today’s technology leaders are funding these investments with existing cash flow rather than borrowed optimism.
That does not mean there is no risk. History reminds us that every technological revolution creates both winners and losers. Some AI companies will almost certainly fail, and others may never justify their current valuations. Markets can become overly optimistic, and corrections are a normal part of investing. We are already seeing companies restructure their workforces as AI improves productivity, and investors have shown they are quick to punish even strong companies if expectations are not exceeded. This is another reminder that disciplined investing and proper diversification remain as important as ever.
We continue to believe AI will become one of the defining technologies of our generation, much like the internet ultimately did after the Dot-Com crash. While many internet companies disappeared, the technology itself transformed nearly every aspect of our economy. We expect AI to follow a similar path. The challenge for investors is not determining whether AI will matter—it almost certainly will—but identifying the companies with durable business models, strong balance sheets, sustainable earnings, and reasonable valuations that can benefit over many years.
Importantly, our investment approach extends well beyond the largest technology companies. Across our portfolios, we continue to own businesses that we believe are well positioned to benefit from long-term trends through strong fundamentals and durable competitive advantages. Companies such as Corning (GLW), Palo Alto Networks (PANW), Caterpillar (CAT), and Seagate Technology (STX) each play important roles in the evolving economy—whether through optical connectivity, cybersecurity, industrial infrastructure, or data storage. While these businesses operate in different industries, they share characteristics we value: established market positions, healthy cash flows, experienced management teams, and the ability to adapt as technology continues to evolve. We believe owning a diversified collection of high-quality companies such as these provides a stronger foundation for long-term investment success than attempting to predict short-term market movements.
As always, our focus remains on owning high-quality businesses with competitive advantages, growing cash flows, and experienced management teams while maintaining diversified portfolios designed to weather periods of market volatility. Short-term headlines can create uncertainty, but history has consistently rewarded patient investors who remain disciplined through changing market cycles.
Thank you for your continued trust and confidence. We appreciate the opportunity to serve you and look forward to helping you navigate whatever the markets may bring.
Sincerely,
J.B. L’Esperance, ChFC
Chief Investment Officer
If you have questions about our strategies or would like to open an account with Barking Sands Capital, please give us a call at 952.500.8854 or 248.687.1400 or email us at jb@barkingsandscapital.com.