The Shiller P/E ratio has climbed to 42, its highest level since the dot-com boom, reviving fears of an AI-driven bust. Alphabet, Amazon, and Nvidia carry heavy AI spending, yet each holds enough cash flow and a low enough valuation to limit downside if the boom cools.
The Shiller P/E ratio has reached 42, its highest level since the dot-com boom, and AI stocks have driven that metric to its highs. The pattern stokes fears the cycle will repeat and end in an AI bust.
AI, like the internet before it, is likely here to stay. Still, internet stocks endured the dot-com bust despite the industry's long-term success, so the same risk applying to AI stocks now is a real concern. Timing such an event is nearly impossible, and investors who sell out to dodge a downturn risk missing further gains. A middle path is to favor tech stocks built to survive a bust rather than avoid the sector altogether.
Alphabet's cash cushion absorbs the spending surge
Google parent Alphabet raised capital expenditures to a $195 billion to $205 billion range for 2026, up from $91 billion in 2025. Its long-term debt more than doubled to over $98 billion over the previous six months, while free cash flow, which excludes capex, fell to $53 billion for the trailing 12 months from $67 billion a year earlier.
Even so, Alphabet's net cash from operating activities reached $186 billion over the same period, and its liquidity climbed above $242 billion. That cushion means Alphabet should be able to service its debt even if the capex spending does not pay off. The stock trades at a P/E ratio of just 17, which should limit its downside in a bust.
Amazon can pull back if AI spending disappoints
Amazon, a dot-com-era darling that suffered a sell-off exceeding 90% after that boom ended, later pivoted its internet strength into cloud computing and then AI. The company pledged $220 billion in capex for 2025, up from $132 billion the prior year, which pushed free cash flow to -$7.6 billion over the trailing 12 months and long-term debt to almost $129 billion.
Still, Amazon generated $161 billion in net cash from operating activities over the trailing 12 months, giving it room to cut capex and reduce debt if AI spending fails to pay off. Its 22 P/E ratio is low enough to limit downside and support a recovery.
Nvidia's chip dominance carries a financing question
Nvidia became the world's largest company by market value by pioneering AI chips, and its dominance holds despite rising competition. Its capex totaled just $6.6 billion over the trailing 12 months, so an AI bust would not strain it there. Instead, the concern is circular financing: Nvidia invested in companies that are also its customers, leaving investors uncertain how much of its growth is organic.
To address the concern, Nvidia partnered with several prominent asset management firms to provide $500 billion in financing, which eases pressure on the company but highlights the industry's reliance on outside capital. Nvidia holds about $80 billion in liquidity against roughly $8.5 billion in total debt and generated $119 billion in free cash flow over the last 12 months. Its 34 P/E ratio suggests any downside would likely be limited and temporary.
Source: The Motley Fool
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