Artificial Intelligence (AI) has quickly become the defining market story of this decade. The technology promises to transform nearly every industry: healthcare, financial services, manufacturing, and more. Investors have taken notice. So much capital has poured into the sector that AI investment is now measured as a share of GDP, valuations have soared, and a handful of companies now dominate global markets.
This raises an increasingly common question: Is today’s AI boom the next market bubble?
While no one can say for certain, we can look to history for clues and plan strategically for the future.
Echoes of the Dot-Com Era – With a Twist
The AI surge shares a clear resemblance to the 1990s internet boom. Back then, the internet was a transformative technology still searching for proven business models. Excitement drove valuations far ahead of actual revenue, especially for start-ups with little more than a website and an idea.
Yet the biggest corporate winner of the dot-com period was not a consumer internet company. It was Cisco, selling the hardware and networking equipment needed to build the internet infrastructure. At its peak, it briefly became the world’s most valuable company, only to fall sharply when exuberance unwound.
Fast-forward to today, and Nvidia has assumed that role. The company supplies the high-performance chips powering AI data centers worldwide. Demand for computing infrastructure has skyrocketed as firms race to develop large language models, autonomous systems, and enterprise AI tools. As Cisco was to the internet thirty years ago, Nvidia is to AI infrastructure today.
But this time, something is different – famous last words in financial markets, of course. During the dot-com era, most capital went into fledgling start-ups with limited revenue. Today, the AI boom is funded by the world’s largest, most profitable companies. Google, Microsoft, Amazon, and Meta each generate tens of billions in cash annually and are spending aggressively on AI development. So yes, this cycle is different in meaningful ways. However, this does not eliminate the risk of over-investment, but it does change the character of that risk.
Instead of small firms burning investor money, highly capitalized technology giants are deploying their own cash, meaning they can sustain spending for longer and absorb missteps more easily. That gives today’s cycle somewhat stronger footing, even if uncertainty remains about future returns.
Nvidia’s $5 Trillion Valuation – Too Much of a Good Thing?
Nvidia’s rise has been extraordinary. The company has become synonymous with AI acceleration, and demand for its chips has been so strong that revenue more than tripled in a short period. As of October 29, 2025 investors are assigning Nvidia a valuation exceeding $5 trillion, placing it among the most valuable companies in history. To put it in perspective, Nvidia’s market value alone exceeds the combined market value of all publicly traded banks in the U.S. and Canada.
Some analysts argue that such a valuation reflects not only strong performance but extremely optimistic expectations. Concerns include:
- Uncertain end-market demand: AI investment is booming, but real revenue from end users is still uncertain.
- Concentrated product exposure: Nvidia’s dominance today relies largely on one category – Graphics Processing Units (GPUs). Competitors are investing heavily to chip away at that lead (pun very much intended).
- Valuation stretched beyond historical norms: Even groundbreaking companies rarely sustain valuations built on extreme growth assumptions indefinitely.
Importantly, the case is not that Nvidia lacks value. It is undoubtedly a critical technology leader, but expectations may be outpacing what the long-term economics can support. Cisco experienced something similar three decades ago: it continued to grow after the dot-com crash, but its valuation at the peak had priced in decades of perfection.
As a firm specializing in valuing privately held companies, we cannot help but notice how far today’s AI-driven multiples diverge from the fundamentals that drive value for core-economy businesses: cash flows, cost of capital, and above all, sustainable growth.
Circular Revenue and the Illusion of Demand
Another dynamic fueling the current boom is the way capital flows within the AI ecosystem. Here is a simplified version of what is happening:
- Funding: Investors and corporations provide capital to AI start-ups.
- Spending: Start-ups (and some big tech firms) invest heavily in infrastructure, primarily chips and cloud services.
- Revenue recognition: AI infrastructure suppliers (some of which are big tech firms themselves) record this spending as revenue and profit.
- Cycle reinforcement: These earnings attract more capital, which flows back to step 1.
This creates a loop in which capital expenditure (CapEx), not revenue from end users, drives growth, with capital circulating among the same few players. To be clear, it is real spending, but not necessarily tied to real economic demand.
We saw a similar version of this during the early 2000s. Equipment makers, including Cisco and Lucent, sold to companies that were themselves funded by vendor financing or speculative capital. The revenue was real, but when financing dried up, sales collapsed.
Today’s AI build-out feels familiar. Many AI companies are not yet generating material revenue from customers, despite spending heavily. Until paying end-users meaningfully adopt the technology, investors cannot be sure demand is durable.
This does not mean the spending is misguided. AI infrastructure may well support transformative applications over time. However, in the near term, these investments can make today’s earnings appear more sustainable than they really are.
History’s Lesson: Winners Are Real, but Rare
After the dot-com bust, many companies disappeared. Amazon became the standout exception. It succeeded by building services with real customer value, not just hype.
The same may happen now. AI will almost certainly reshape industries. But the ultimate winners, those who convert technology into durable business models, are still unclear. For now, infrastructure providers are the clearest beneficiaries, just as Cisco was in the early 2000s.
Market Concentration: You are in AI Whether You Choose to or Not
Another unique feature of today’s market is the enormous weight of large technology companies in major stock indices. The top seven U.S. companies, all heavily involved in AI, account for a historically outsized portion of the S&P 500, Russell 1000, and Nasdaq 100.
This means that even passive investors have significant AI exposure. Whether one is deliberately investing in AI or simply holding diversified index funds, portfolio performance is influenced by AI-driven companies.
Market concentration could deepen further. OpenAI’s planned IPO may reach a $1 trillion valuation, making it the largest public offering in history. If OpenAI is added to major indices, it would further concentrate the market in a few AI centric companies.
- The upside: participation in innovation.
- The concern: heightened concentration risk.
So, Is AI a Bubble or Not? A Balanced View
Signs it may be a bubble:
- Valuations far above historical averages
- Spending driven by investor capital rather than customer demand
- Limited visibility into near-term commercial use cases
- Fear-of-missing-out (FOMO) behavior
Signs it may not be a bubble:
- AI is a genuinely transformative technology
- Major companies with real earnings are driving investment
- Early productivity gains are emerging across industries
- Global competition (especially U.S.–China) accelerates adoption
The truth may lie somewhere in between:
- The technology is real, but expectations may be too aggressive.
How to Navigate It Strategically
A few strategic principles may help frame the discussion:
- Recognize that AI exposure is likely already embedded in portfolios
- Maintain diversification, not every company will succeed
- Expect volatility: transformative periods often overshoot before stabilizing
- Keep perspective: long-term trends matter more than short-term headlines
Conclusion
AI has all the hallmarks of a bubble: breathtaking valuations, rapid capital inflows, and uncertain near-term economics. At the same time, the underlying technology is powerful and big tech has the resources to continue investing, even if payoffs take time.
If it is a bubble, we will only know in hindsight.
But history teaches an important lesson: technological revolutions can produce bubbles, and bubbles can produce the next generation of great companies. In the meantime, staying informed, balanced, and disciplined may be the most valuable strategy of all.
Whether this topic raises questions about your business’s value or the impact on your investment strategy, our multidisciplinary team is ready to discuss what these emerging technologies could mean for your financial goals. Reach out anytime, we are always glad to talk.
Business Valuation & Investment Banking Analyst
Baldwin & Clarke Corporate Finance, LLC
Email: sergio@baldwinclarke.com
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