Understand AI companies and their stock risks, dot-com parallels, and strategies for career stability in volatile markets
Contrary to popular belief, AI companies aren’t printing money. The ‘cutting-edge’ label doesn’t shield them from the brutal realities of the market. Even those making the boldest AI bets are vulnerable to economic tremors.
Some of you may be thinking that if the tech titans are investing billions in their companies to develop large language models and AI applications, then they are a safe bet. However, spending on that level can make them vulnerable. If interest rates rise or the market gets a bit jittery, they’re likely to feel the pain just like anyone else.
That’s why if you’re looking to become engaged by a client basing much of their future growth on AI, it will pay to look under the hood before you pitch, or if things have progressed, sign a contract.
This article provides some context about booms and busts and what exactly to look for in a client who is gung-ho about AI.
Dot-Com Deja Vu?
We’re coming up to the 25th anniversary of the dotcom bust. Remember Pets.com? Boo.com? All that hype, then poof – gone. Those who lived through the dot.com bubble might be feeling nostalgic while at the same time thinking, is all the excitement about AI too good to be true?
Susannah Streeter at Hargreaves Lansdown reminds us of what happened: “When interest rates started to ratchet up and funding dried up, the dot.com party ended in dramatic fashion. The big bust when it came shattered confidence and rocked the foundations of online world, as irrational exuberance blew up in investors faces.”
Now, people are wondering if AI is the next bubble. Look at Nvidia, Tesla, Palantir – they’ve all taken a hit recently.
But, as she rightly says, “there will be survivors of any storm on financial markets.”
“Survivors saw their share prices battered. Networking equipment IT company Cisco, which had swelled amid the hype to become the most valuable company in the world, with a price-to-earnings ratio of 201, saw its shares fall 88%, and its stock has still not fully recovered. Amazon shares soared in value in 1999 before collapsing in spectacular fashion. Shares fell 90% as the company, then known as an online bookseller, was hit by the crisis of confidence as the noughties era began.”
But look at Amazon now. So, the question is, how do you spot the companies that’ll weather the storm?
What to look for in a company before you apply
Given the inherent risks, how can professionals assess the stability of AI-focused companies and safeguard their careers? Here are factors to consider:
Diversified revenue streams: Companies with diverse revenue streams beyond AI development should be more resilient. Look for businesses with established core products or services that generate consistent income, providing a buffer during market downturns. A company which has AI as a part of its business, versus AI as its sole business, is more likely to weather market storms.
Strong financial fundamentals: Analyse the company’s financial statements, including its balance sheet, income statement, and cash flow statement. Company financial reports can be found at the back of an Annual Report, the company’s investor relations section of their website and the related stock exchange’s regulatory news service.
Key indicators for a healthy company could include:
Low debt-to-equity ratio: Indicates a company’s ability to manage debt and withstand financial strain
Healthy cash reserves: Provides a cushion for ongoing operations and investments during economic downturns
Consistent profitability: Shows a company’s ability to generate sustainable revenue and manage expenses
Sustainable AI strategy: Evaluate the company’s long-term AI strategy. Is it focused on practical applications and generating tangible value, or is it driven by hype and speculative projects? Look for companies that:
- Prioritise responsible AI development and deployment
- Focus on integrating AI into existing workflows and improving efficiency
- Demonstrate a clear path to monetisation and return on investment
Established market position: Companies with a strong market presence and established customer base are more likely to weather economic storms. Look for companies with:
- A proven track record of innovation and product development
- A loyal customer base and strong brand recognition
- A competitive advantage in their respective markets
Transparency and Corporate Governance: Companies with transparent financial reporting and strong corporate governance are more likely to maintain investor confidence and navigate market challenges
R&D spending: Is the R&D spending in line with competitors and results?
Black swan events and AI vulnerability
AI-based trading, like the AI models themselves, relies on historical data, making AI stocks vulnerable to “black swan” events—unexpected global crises. Examples include:
- 9/11 Attacks (2001): AI models could not have foreseen the sudden impact of terrorist attacks
- COVID-19 Pandemic (2020): The COVID-19 pandemic highlighted AI’s ability to detect early warning signs but also its limitations in predicting rapid recoveries
- Silicon Valley Bank Collapse (2023): AI could not anticipate panic-driven bank runs
Earlier this year AI itself became the centre of a stock market crash in early 2025. People became sceptical about the burgeoning technology and sizeable investment going into it. Was it sustainable? New entrants like China’s DeepSeek were accomplishing what large LLMs do in half the time and money. Meta and others had a major shock. But we had seen things like this just months before in 2024 when Nvidia lost over $200 billion in market capitalisation in a single week as AI-driven funds exited their positions all at once.
We’ve seen how AI stocks can both boost and destabilise the market. For example, the COVID crash showed that AI can react quickly to emerging trends, but it can also miss the bigger picture. The idea of an even bigger “AI selloff” in the future? It’s a reminder that AI-driven trading can create its own problems.
Full of risks and opportunities
The AI sector is full of opportunities, but it’s also full of risks. When applying for a fixed-term contract or a freelance project that could take up much of your time and earning potential, do your snooping first. Look beyond the hype and focus on the fundamentals.
As Susannah Streeter said, “The rules of the AI game are evolving so quickly that some of the giants of the future may still be under the radar, with founders working in a lab, a garage or in a corner of a conference hall, with their innovations just waiting to be discovered.”
Keep your eyes peeled, you might just find the next Amazon and get the chance to work with them before the market crashes again.
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