The rise of Nvidia Corp. is captivating the stock market and driving the S&P 500 to new highs. But it also raises cautionary calls for another investor darling that soared in dreams of technological transformation, only to come crashing back to earth when those hopes turned to disappointment.
Those shares belong to Tesla Inc., which sparked its own mania in 2017 as investors bet that electric vehicles would take over the world. At the time, Elon Musk’s company was a phenomenon as it overtook established automakers such as General Motors Co. and Ford Motor Co. in terms of market capitalization to become America’s largest automaker. Some analysts looked beyond the industry and called it “the next Apple Inc.”
Now, Tesla shares are down more than 50% from their 2021 peak, and other electric vehicle stocks that have rallied with it are a shadow of their former selves. All of this should give pause to Nvidia investors who see the stock as an open-ended bet on an AI future.
“We’ve seen time and time again that when investors fall in love with the idea of the technological innovation du jour, logic takes a backseat,” Adam Sarhan, founder and CEO of 50 Park Investments, said in an interview. “And when emotion takes over, the sky is the limit.”
Betting on growth
There are many differences between Nvidia and Tesla, from the products they make to the personalities of the men who run the companies. But the parallels are striking.
Nvidia’s rise from niche chipmaker to one of the world’s largest companies is based on the premise that its phenomenal sales growth over the past year has held up. Tesla’s big rally in 2020 that took its valuation well above $1.2 trillion was based on the assumption that electric vehicles would be widely and rapidly adopted and that the company would dominate that market. market.
But reality interrupted that story. Demand for electric vehicles is slowing as the wave of enthusiastic early adopters have already purchased, and more price-conscious and change-averse consumers are taking longer than expected to convert to new technology. As a result, Tesla is down 31% from its recent high last July and is one of the biggest percentage losers in the Nasdaq 100 index this year.
“There’s all this potential in the driverless car, the cybertruck, and stocks are taking a hit. Why? They’re losing market share and they’re losing margins. In the world of technology this is the kiss of death,” said Sameer Bhasin, principal at Value Point Capital.
For Nvidia, it’s too early in the hype cycle for any sign of slowing down. The Santa Clara, California-based company has delivered impressive results for four consecutive quarters, fueled by what appears to be insatiable demand for its chips used to train large language models that power artificial intelligence applications like ChatGPT by OpenAI.
After more than tripling last year, the stock is once again the best performer in the S&P 500 index in 2024, with a rise of 66%. Its market value of more than $2 trillion is less than that of only two U.S. companies: Apple Inc. and Microsoft Corp.
Talk of the widespread use of artificial intelligence across industries and businesses brings to mind the excitement around the Internet and the years leading up to the dot-com bubble. But unlike that era, when Internet companies were measured on new metrics like “clicks” while losing money, Nvidia is producing huge profits. Net profit jumped more than 500% to nearly $30 billion last year and is expected to double this year, according to data compiled by Bloomberg.
The risks are lurking
These large profits, and the company’s ability to continually beat estimates, have helped keep the expected P/E ratio in check as Wall Street analysts continue to raise their estimates. Still, at 18 times expected earnings, it’s the most expensive stock in the S&P 500 — and is priced close to where Tesla was at its peak.
Currently, the semiconductor maker has a sizable lead in the types of graphics chips that excel at processing large amounts of data used in artificial intelligence models. But its competitors are eager to grab a slice of that market. Advanced Micro Devices Inc. recently released a line of accelerators, and even Nvidia customers like Microsoft Corp. are racing to develop chips.
“If you really believe in this AI frenzy, you can visualize a future 10 years from now where AI is embedded in lots of places and you need these huge systems running chips that can only be provided by Nvidia,” he said. said Sameer Bhasin, capital at Value Point Capital. “Even if there is a perception of a pause in buying, the stock will get hit.”
None of this is meant to ignore the disruptive power of electric cars or artificial intelligence. But this raises the question of whether investors are paying for future growth that may never come? Much like a dot-com era market favorite, Cisco Systems Inc., is still a successful company, but investors who bought the stock around its peak and held on are still waiting to recoup their losses, 24 years later.
“The bubble exists because the underlying idea is real,” said Cole Wilcox, managing director and portfolio manager at Longboard Asset Management. “But just because the overall macroeconomic wave is real, doesn’t mean that all of these initiatives will turn out to be good investments. You will have to be able to separate the winners from the losers.”