Alger Funds CEO: AI Boom Still Has Room to Run

AI Boom Continues to Show Promise, Says Alger Funds CEO

The surge in AI stocks has raised concerns about a potential bubble, but Alger Funds CEO Dan Chung believes the AI boom still has significant room to grow. Chung argues that today’s AI leaders are more fundamentally sound than the internet companies of the dot-com era, suggesting that the current rally is sustainable.

"The AI boom is not just hype," Chung stated in a recent interview. "Unlike the dot-com bubble, today’s tech giants are profitable and have strong financial metrics." This perspective challenges the growing fears that AI stocks are headed for a crash similar to the early 2000s.

Profitability: A Key Difference from the Dot-Com Era

One of the most significant differences between the current AI boom and the dot-com bubble is profitability. In the late 1990s, many internet companies, including Amazon, were not profitable. Investors who focused solely on short-term cash flow often missed the long-term potential of these companies. In contrast, today’s AI leaders, such as Nvidia and Microsoft, boast impressive revenue, operating cash flow, and free cash flow, even after substantial AI-related investments.

"These strong financial metrics indicate a more sustainable foundation for growth," Chung explained. "The companies driving the AI boom are not only innovative but also financially robust, which was not the case during the dot-com era."

Microsoft: A Case Study in Changing Valuations

Chung uses Microsoft as a prime example to illustrate the differences between the dot-com bubble and the current AI boom. During the dot-com era, Microsoft traded at a P/E ratio three times the market average. Today, despite being a larger and more profitable company, Microsoft’s P/E ratio is closer to its historical norm. This suggests that the market is not as overly optimistic as it was in the late 1990s.

"Microsoft’s current valuation is a clear indication that the market is more rational today," Chung noted. "The company’s strong fundamentals and reasonable P/E ratio provide a solid basis for continued growth in the AI sector."

Nvidia vs. Cisco: A Comparison of Valuations

Chung also contrasts Nvidia’s current valuation with Cisco’s during the dot-com boom. At the height of the dot-com era, Cisco’s P/E ratio reached a staggering 126 times earnings. Nvidia, despite its rapid growth, trades at a much more reasonable 33.5 times earnings, based on consensus estimates. Alger Funds’ internal estimates suggest that Nvidia’s valuation may be even lower.

"Nvidia’s valuation is a testament to the company’s strong financial performance and growth potential," Chung said. "Unlike Cisco during the dot-com bubble, Nvidia’s valuation is supported by solid financials and a clear path to profitability."

Chung’s Stock Picks: Nvidia and Nebius

In addition to Nvidia, Chung highlights Nebius as a promising AI data center company. Nebius is experiencing rapid growth and has secured major deals with hyperscalers, indicating that the AI boom is creating opportunities for both established tech giants and smaller, specialized companies.

"Nebius is projected to increase its revenue five-fold, from $500 million in 2025 to over $2.5 billion in 2026," Chung stated. "The company’s open-source data management business, ClickHouse, is well-positioned to capitalize on the growing demand for AI infrastructure."

The Long-Term Potential of AI

The AI revolution is still in its early stages, and while the market may experience volatility, the long-term potential of machine-learning tools remains significant. Chung argues that investors who focus on companies with strong fundamentals and sustainable business models are more likely to benefit from this transformative technology.

"The AI boom is not just a short-term trend," Chung concluded. "It represents a fundamental shift in technology that will drive long-term growth and innovation."

Addressing Job Displacement

While the AI boom promises significant economic growth, Chung acknowledges the potential for job displacement due to automation. "AI can enhance productivity and create new opportunities, but it may also lead to unemployment in certain sectors," he warned. "Addressing this challenge will be crucial to ensuring a more balanced and equitable society."

As the AI boom continues to unfold, investors and policymakers alike will need to navigate the opportunities and challenges it presents. Chung’s analysis provides a nuanced perspective on the current market, emphasizing the importance of strong fundamentals and sustainable growth.