Source NDTV profit
NEW DELHI — Sridhar Vembu, the founder and chief scientist of Zoho Corporation, has issued a stark warning regarding the meteoric rise of artificial intelligence (AI) stocks. He cautions that the current surge in Big Tech valuations has created a market bubble that could dwarf the infamous dot-com crash of 1999.
Taking to the social media platform X, the prominent bootstrapped tech billionaire highlighted the soaring price-to-sales (P/S) ratios of several global tech giants. He argues that these valuations have become severely disconnected from traditional corporate fundamentals.
The Anatomy of the Tech Peak
Rather than focusing on price-to-earnings (P/E), Vembu pointed directly to raw revenue multiples to illustrate the scale of the inflation. He flagged several frontrunners driving the AI rally:
Nvidia: Trading at an astonishing 20x sales.
Micron Technology: Trading near 19x sales.
Alphabet (Google): Standing at roughly 11x sales.
Apple & Microsoft: Command P/S ratios of approximately 10x to 11x.
Meta Platforms: Sitting at about 7.5x sales.
To put these numbers into perspective, Vembu invoked a famous warning from the post-dot-com fallout given by Scott McNealy, the former CEO of Sun Microsystems, in 2002. McNealy had noted that to give an investor a ten-year payback on a stock trading at 10x revenues, a company would theoretically have to return 100% of its revenues as dividends for 10 straight years—an impossible feat requiring zero expenses, zero taxes, and zero reinvestment.
“This is an insane bubble, even bigger than 1999,” Vembu stated, warning that paying such steep revenue multiples assumes flawless corporate execution and historic profitability for a decade or more.
A Market Divided: Fluff vs. Fundamentals
Vembu’s public critique has sparked intense debate within the financial and tech sectors. While many market observers echo his concerns about overextended hype, critics of the “bubble” narrative argue that comparing today’s market to 1999 ignores a fundamental truth: today’s tech giants are incredibly profitable.
Unlike the dot-com era, where unprofitable startups went public on mere promises, companies like Nvidia are generating tens of billions of dollars in actual net income. Defenders of current valuations point out that Nvidia converts more than half of its sales into profit, pulling its forward price-to-earnings ratio into a much more justifiable territory than historical bubble entities.
Furthermore, observers point out that cyclical hardware companies like Micron are priced based on rapid, year-over-year revenue spikes rather than stagnant trailing sales.
Accounting Loops and Capital Flushes
This isn’t the first time the Zoho chief has cast skepticism on the AI gold rush. Vembu has previously critiqued the structural accounting loops propping up the sector. He noted that a considerable portion of apparent AI growth is driven by “round-tripping”—where tech giants invest billions into AI startups under agreements that mandate those startups immediately route the capital back to the giant to rent cloud servers.
While the tech sector remains deeply divided on whether a hard landing is imminent, Vembu stresses that navigating this cycle without “losing one’s shirt” requires stripping away the financial hype to focus purely on the long-term, functional utility of the technology.
You can view a deeper discussion on tech cycles and market hype in this interview with Sridhar Vembu, which outlines his broader philosophy on the global tech ecosystem and why he maintains a conservative, bootstrapped approach to building software.
