Is the "AI Hype Cycle" Just Beginning? Why the Biggest Gains Are Still Ahead

Nvidia (NASDAQ: NVDA) set the foundation for one of the biggest multiyear stock market rallies in recent memory. Artificial intelligence (AI) became the buzzword of the moment, and investors poured their capital into shares of every company that had any connection to the innovative technology.

The current AI boom resembles the dot-com boom. New technology has captivated people's imaginations, and on Wall Street, the question to ponder is just how much companies can boost their revenue by using it.

When the dot-com bubble burst, the result was a steep decline and significant losses, even though eventually, the internet ended up changing every industry. And in the wake of the remarkable run-ups that so many tech stocks have experienced in the past few years, some investors are worried that AI stocks are in a bubble of their own. However, there are key differences between the dot-com era and this one that suggest the AI hype cycle is just beginning.

AI is already producing profits

Image source: Getty Images.

One critical weakness of the dot-com bubble was that most of the companies that participated in it weren't profitable, but adding ".com" to the end of a struggling corporation's name was enough to send its shares soaring. This is also the period when Mark Cuban sold unprofitable Broadcast.com to Yahoo for $5.7 billion, giving it a price-to-sales ratio of 57.

AI doesn't just deliver headlines. It also generates profits for its investors. Nvidia made almost $32 billion in its fiscal 2026 Q3, in large part due to sales of GPUs that will be used to power AI workloads. Tech giants like Meta Platforms and Microsoft have also boosted their profits with AI-related revenues and by using AI tools.

The technology is also helping companies improve their products and services, while boosting growth. For instance, CrowdStrike uses AI to enhance its cybersecurity services. Walmart is also using the technology to streamline warehouse tasks and save its workers time.

Follow the money

Big tech is projected to spend over $400 billion on AI infrastructure this year, and the companies involved have already told investors that they will spend even more on AI next year. Tech giants don't spend money just for the sake of it. They aim to generate positive returns on investment from every dollar. When these corporations compete against each other to throw money at AI, it's a big deal.

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) is investing in AI to ensure that Google's dominance in the search space remains intact as AI chatbots like ChatGPT and Grok threaten to change how people seek information online. It's also pouring capex into Google Cloud and its Waymo autonomous vehicle business, two segments with high growth potential that rests in part on AI.

AI spending has become so massive that it's impacting U.S. gross domestic product more than consumer spending. The companies that win the AI race could end up operating autonomous vehicle fleets, selling robots that can perform any task, and offering the most competitive software. No tech giant wants to wind up in a position like Eastman Kodak found itself in when smartphones came out, and that's why they continue to spend heavily on AI.

Smaller AI companies are the next opportunity

At this stage of the "AI hype cycle," investors are starting to realize that there are far more AI stock opportunities than Nvidia, its hyperscaler customers, and the rest of the big tech megacaps. So instead of focusing their attention on companies that have market caps above $1 trillion, some are looking to invest in smaller companies that are benefiting from AI.

There are more of these types of opportunities than you'd expect, with most of the five best-performing S&P 500 stocks up by more than 3,000% over the past decade. That list doesn't include Tesla, Shopify, or Palantir, which have each produced remarkable returns for investors who bought early and held on.

Every year, a few stocks come along that multiply gains rapidly for patient investors. Some small companies that address AI bottlenecks and optimizations look poised to provide those types of results for long-term investors.

Iren (NASDAQ: IREN) and Cipher (NASDAQ: CIFR) are addressing the need for AI-capable data centers. Nuclear energy startups like NuScale (NYSE: SMR) and Oklo (NYSE: OKLO) are also gaining momentum as investors recognize that small modular reactors could play a long-term role in meeting the voracious energy appetites of AI data centers. Liquid cooling specialists and rare earth miners are among the other businesses that could produce serious long-term winners due to the AI boom.

Using artificial intelligence makes companies more competitive, and the technology has already delivered meaningful growth. And big tech's parabolic capex budgets and various case studies suggest that new AI investors aren't too late to the party.

Marc Guberti has positions in Cipher Mining and Iren. The Motley Fool has positions in and recommends Alphabet, CrowdStrike, Meta Platforms, Microsoft, Nvidia, Palantir Technologies, Shopify, Tesla, and Walmart. The Motley Fool recommends NuScale Power and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.