Nvidia Corp.’s rise has captivated the stock market, pushing the S&P 500 index to new highs. But it’s also a cautionary reminder of another beloved investor who soared with dreams of technological change only to fall back into the fold when his hopes turned to disappointment.
The stock belongs to Tesla Inc., which sparked its own mania in 2017 as investors bet that electric cars would take over the world. At the time, Elon Musk’s company caused a phenomenon by becoming America’s largest automaker in terms of market capitalization, overtaking established automakers such as General Motors and Ford Motor Co. Some analysts across the industry were calling it “the next Apple.”
Tesla stock is now down more than 50% from its 2021 highs, and other EV stocks that rose in tandem with Tesla are no longer what they once were. All of this will be sobering for investors who see Nvidia stock as an unlimited bet on the future of AI.
“Time and again, we see that when investors get caught up in the idea of everyday innovation, logic takes a backseat,” Adam Sirhan, founder and CEO of 50 Park Investments, said in an interview. I’ve come,” he said. “When emotions rule, there are no limits.”
EV deceleration
There are many differences between Nvidia and Tesla, from the products they make to the personalities of the people who run the companies. But the similarities are striking.
Nvidia’s rise from a niche chipmaker to one of the world’s largest companies rests on the premise that its impressive revenue growth over the past year has staying power. Tesla’s breakthrough in 2020, which saw its valuation rise to well over $1.2 trillion, was based on the premise that EVs would become widely and rapidly adopted and that Tesla would dominate the market. Ta.
But reality interrupted that story. Demand for EVs is slowing as a wave of eager early adopters have already bought them and price-conscious and change-averse consumers are taking longer than expected to migrate to new technology. As a result, Tesla has fallen 31% from its recent high last July, making it one of the worst-performing companies on the Nasdaq 100 this year.
“With all the potential for self-driving cars and Cybertrucks, stock prices are taking a hit. Why? They’re losing market share, they’re losing margins. In the world of technology, that’s the kiss of death.” said Sameer Bhasin, principal at Value Point Capital.
For Nvidia, it’s still too early in the hype cycle to show any signs of a slowdown. The Santa Clara, Calif.-based company posted an impressive fourth straight quarter, driven by what appears to be insatiable demand for chips used to train large-scale language models that power AI applications such as OpenAI’s ChatGPT. has achieved outstanding results.
After more than tripling last year, the stock rose 66% in 2024, once again being the best performer in the S&P 500. Its market value exceeds $2 trillion, trailed only by two American companies: Apple and Microsoft.
Stories about the widespread use of AI across industries and businesses are reminiscent of the excitement surrounding the internet and the years leading up to the dot-com bubble. But unlike the days when Internet companies were being measured on new metrics like “clicks” while draining money, NVIDIA is generating huge profits. Net profit soared more than 500% last year to nearly $30 billion and is expected to double this year, according to data compiled by Bloomberg.
“AI craze”
These strong profits and sales, along with the company’s ability to consistently exceed expectations, have helped keep valuation metrics in check. Still, Nvidia has the highest price-to-sales ratio on the S&P 500 at 18.
The semiconductor maker currently holds a considerable lead in the types of graphics chips that are better at handling the large amounts of data used in AI models. But competitors are eager to grab a slice of that market. Advanced Micro Devices Inc. recently released a series of accelerators. And even his Nvidia customers, such as Microsoft Corp., are competing to develop chips.
“If you really believe in this AI craze, you can imagine a future 10 years from now where AI is embedded in so many different places that you need these massive systems running chips that only Nvidia can provide. ,” said Sameer Bhasin. Principal of Value Point Capital. “Even if there is a perception that there is a lull in buying, stocks will still be hurt.”
None of this negates the disruptive power of electric vehicles and AI. But the question arises: Are investors paying for future growth that may never materialize? Cisco Systems, the market darling of the dot-com era, remains a successful company, but investors who bought at the stock’s peak and held on are still waiting to recoup their losses 24 years later. ing.
“Bubbles exist because the underlying idea is reality,” said Cole Wilcox, CEO and portfolio manager at Longboard Asset Management. “But just because the general macro wave is real doesn’t mean all of these ventures will be good investments. You have to be able to distinguish the winners from the losers.”
