What every AI investor should remember about the internet boom
WHY THIS MATTERS TODAY
Artificial intelligence (AI) may prove to be one of the most transformative technologies of our lifetime. History suggests, however, that recognizing a technological revolution is often easier than identifying the companies that will create the most value from it. Twenty-five years ago, investors correctly believed the internet would change the world. Many were equally confident they knew which companies would dominate that future. Nortel, Yahoo, AOL, Lucent, and JDS Uniphase were widely viewed as inevitable winners.
Meanwhile, some of the internet era’s greatest success stories were overlooked, underestimated, or had yet to emerge. The lesson is not to avoid AI. AI may prove to be every bit as transformative as the internet. If history is any guide, however, the biggest winners may not be the companies investors expect today.
THE NEXT REVOLUTION
Every few decades, a technology emerges that fundamentally changes the way we live and work. Railroads connected continents. Electricity transformed industry. Automobiles reshaped cities. The internet changed how we communicate, shop, work, and access information.
Today, AI appears poised to join that list. The excitement surrounding AI is understandable. Its potential applications seem almost limitless. Businesses are investing billions of dollars. Governments are paying attention. Investors are searching for the companies they believe will define the next era of economic growth.
In many respects, the enthusiasm feels familiar. A quarter century ago, investors were having similar conversations about the internet. They knew something important was happening. They knew the technology would change the world. What they did not know was exactly how that future would unfold. More importantly, they did not know which companies would create the most value for investors. That distinction matters. History suggests that identifying a transformational technology is often much easier than identifying the businesses that will benefit from it.
The internet provides one of the clearest examples. Many of the companies investors believed would dominate the digital age disappeared, were acquired, or delivered disappointing results. Meanwhile, some of the era’s greatest winners were overlooked, underestimated, or had not yet emerged.
As AI continues to evolve, the internet era offers an important reminder: Investors are often very good at identifying revolutionary technologies. They are far less successful at identifying the long-term winners.
THE MARKET DARLINGS OF 2000
At the height of the internet boom, investors believed they knew which companies would dominate the future. Those beliefs were entirely reasonable but proved incorrect. Nortel declined approximately 100% from peak to trough and filed for bankruptcy. Lucent declined approximately 99% from peak to trough and disappeared as an independent company. JDS Uniphase lost approximately 97% of its value. Yahoo declined approximately 96% from peak to trough and its core business was sold. AOL declined approximately 95% from peak to trough and ceased to be the dominant force investors once imagined. Cisco remains a successful company today, yet investors who purchased near the peak still experienced a decline of approximately 89% from peak to trough.
Most investors correctly recognized that the internet would become one of the defining technologies of their lifetime. What they could not know was exactly how that future would unfold, which companies would benefit most, and which business models would endure.
THE WINNERS WERE NOT OBVIOUS
Many of the exciting internet stocks of the late 1990’s produced extraordinary gains, but only temporarily. The problem was investors often had to be right twice: first about the opportunity, and then about when to sell.
Magazine articles from 1999 and 2000 highlight the excitement and perceived opportunity of the emerging internet industry. Investors felt there was an opportunity and did not want to miss out.
But the winners were not obvious. The most important lesson from the internet era is not that the perceived winners failed. It is that many of the eventual winners were hiding in plain sight.
At the height of the internet boom, investors spent enormous amounts of time debating Nortel, Lucent, AOL, Yahoo, and dozens of other companies that appeared central to the future of the internet. Very few investors were talking about cloud computing because it did not yet exist in its current form. Very few investors anticipated social media, streaming, app ecosystems, or the business models that would eventually define the digital economy. The future arrived. It simply arrived in a form that few people expected.
Consider Amazon. In 1999, Amazon was viewed as an online bookseller. Few could have predicted that Amazon would eventually become a dominant force in cloud computing through Amazon Web Services, one of the most important businesses in the modern economy, and revolutionize retail shopping.
Consider Apple. At the turn of the century, Apple was struggling for relevance. Few investors were forecasting the iPod, the iPhone, the App Store, or the ecosystem that would eventually make Apple one of the most valuable companies in history.
Consider Google. The company was privately owned during most of the internet boom, only going public in 2004. Few investors fully appreciated how powerful digital advertising would become or Google’s future dominant position.
The biggest winners of a technological revolution are not always the companies that appear most obvious during its earliest stages.
BENEFICIARIES BEYOND THE BUILDERS
Investment in AI may present a similar challenge today: investors often pick the wrong companies, miss identifying the true long-term successes altogether, and struggle to identify the price peak while also accurately timing the exit.
The debate is not whether AI will matter. The debate is where the value will accrue. History suggests some of the greatest beneficiaries of a technological revolution are often the companies that successfully adopt the technology rather than only those that invent it. Healthcare, industrials, financial services, software, and consumer businesses may all benefit significantly from AI-driven productivity gains but are largely overlooked in the AI excitement.
Many of these businesses already possess characteristics investors have historically valued: strong balance sheets, proven leadership teams, durable competitive advantages, healthy cash flows, and established operating histories. In other words, investors may not need to choose between innovation and quality.
THE INVESTMENT LESSON
Investors should not avoid AI. AI may prove to be every bit as transformative as the internet. The challenge is that we do not know what an AI-enabled economy will look like, nor do we know which companies will emerge as the biggest long-term beneficiaries. Investors often assume the challenge is predicting the future.
Investors may correctly identify the revolution while incorrectly identifying its winners. That is why Forseth & Co. Wealth Strategies focuses on quality companies. Companies with strong balance sheets. Companies with capable management teams. Companies with durable competitive advantages. Companies that generate meaningful cash flow. Companies that have demonstrated an ability to adapt and evolve. We believe these businesses will benefit from AI regardless of which models, chips, software platforms, or applications emerge as the dominant winners.
Rather than attempting to predict a small handful of ultimate winners, we believe investors are best served by owning a diversified portfolio of quality companies positioned to benefit from innovation.