Are AI Stocks the Next Pets.com? Key Bubble Indicators Investors Should Watch

Nvidia’s monster earnings. A massive 200%+ post-IPO pop from AI cloud-computing startup CoreWeave. Multi-billion-dollar valuations for companies still chasing profits. If this all sounds familiar to you, you’re not alone. Talk of a potential AI stock bubble is growing. Some experts even say we might be deep into the hype phase.

So, is this market doomed to a fate like the dot-com bubble, when hype-fueled companies surged, and firms like Pets.com raised $82.5 million in an IPO, only to go bankrupt nine months later? Not necessarily, but there’s certainly reason to be cautious.

Here’s what retail investors need to know before the bubble bursts—or the next leg of the AI boom begins.

The Dot-Com Déjà Vu: Warning Signs History Is Repeating

Ted Mortonson, managing director at financial services company Baird, remembers the dot-com bubble well and says that while today’s AI cycle is more “material and transformational,” retail investors may be repeating old mistakes.

“We’re looking at a red Dodge and calling it a Ferrari,” he said. Mortonson points to signs of euphoria like sky-high valuations on names with little to no profits, and venture funding flooding startups with shaky financials. “This market is the casino.”

By one measure, the S&P 500 is trading at about 22 times forward earnings—shy of the nearly 25 times multiple at the height of the dot-com era but above the 30-year average of 17.

In comparison, some popular AI names are trading at absolutely eye-popping multiples. Among them are Palantir Technologies (PLTR), Snowflake (SNOW), and CrowdStrike (CRWD), which trade at about 265, 190, and 135 times forward earnings, respectively, as of July 23, 2025. These elevated valuations don’t necessarily spell doom, but they do make stocks more susceptible to sharp declines if earnings miss expectations or sentiment sours.

Mortonson points to another key difference between today’s market euphoria and the dot-com era hype. “What happened in 2000 was an unlimited amount of money,” he notes. “In this cycle, it’s much more discerning.”  

While venture dollars are again chasing early-stage startups—many of which are unprofitable and unproven—this boom is anchored by cloud titans like Microsoft (MSFT)and Google (GOOGL), which are pouring billions into AI using real cash flow.

CFRA tech equity analyst Angelo Zino also noted the growing hype but stopped short of calling it a full-on bubble. “I don’t think we’re in a bubble, but there are signs that maybe we are starting to get more euphoric than we’ve been over the last two-plus years,” he said.

He points to the surge in tech stocks off the April 2025 lows as one sign the market may be overheating. Since then, the tech-heavy Nasdaq Composite has skyrocketed more than 35%.

Red Flags Your AI Investment Might Be Overvalued

If you’re a retail investor trying to build AI exposure, tread carefully—especially with unprofitable names. Mortonson warns that many smaller AI companies “are brilliant on the technology side but ignorant on the financial side.” Without cash flow or solid cost control, these firms are one rough earnings miss away from a market correction.

Zino agrees, adding that the best way to spot risk is to look at the quality of earnings and valuation relative to real demand. “We’ve been going straight P/E for the most part,” he said. When it comes to names like Nvidia (NVDA), Zino points out that earnings power remains robust because spending on computing will “continue to be aggressive year in and year out.”

But that doesn’t apply to everyone. Some names are being driven more by expected bookings and hype than by profit or even revenue, Zino said, adding: “Oftentimes, that’s a risky proposition.”

How to Build a Bubble-Proof AI Portfolio

Both analysts offered a similar playbook: Stick with the big names.

“Own the cloud Titans and let it ride for a couple of years,” Mortonson says. That includes companies like Microsoft, Google, Meta (META), and Amazon (AMZN), all of which are driving the AI buildout with real infrastructure, top-tier engineers, and piles of free cash flow.

Zino echoed that approach: “For those more risk-conscious but still wanting to play the AI theme, I think those are the best ways to play it—reasonable valuations that have legs.”

Zino also warned that while the top names may be safe for now, investors need to stay sharp. “There’s still going to be risks,” the analyst said. “You’ve got to be selective in this market; the higher up on the quality that you go, I think the better off you are.”

The Bottom Line

The AI boom isn’t all hot air—at least not yet. Analysts agree the long-term potential is real, but also warn that the hype cycle is running hot. Retail investors should look beyond buzzy tickers and focus on fundamentals like free cash flow and earnings quality.

The safest bets? Cloud giants and infrastructure leaders with durable business models. As Mortonson put it: “Lock in some gains. You’ve won.”