Nvidia takes over from Tesla as market shifts focus from electric vehicles to artificial intelligence

The surge of Nvidia Corp. is capturing the attention of the stock market and propelling the S&P 500 Index to record levels. However, it also serves as a warning of the potential risks associated with investing in companies that experience rapid growth based on promises of technological innovation, only to later disappoint investors.

The shares belong to Tesla Inc., which sparked its own mania in 2017 as investors bet on the world being taken over by electric vehicles. At the time, Elon Musk’s company was a phenomenon, blowing past established automakers such as General Motors Co. and Ford Motor Co. to become America’s largest automaker. Some analysts looked beyond the industry, calling it “the next Apple Inc.”

Now Tesla shares are down more than 50% from their 2021 peak, and the other electric vehicle stocks that rose with it are shadows of their former selves. All of this should come as a shock to Nvidia investors, who see the stock as a limitless bet on the future of artificial intelligence. The company’s shares have risen 66 percent this year after more than tripling in 2023.

“We’ve seen time and time again that when investors fall in love with the idea of the technology innovation du jour, logic takes a backseat,” Adam Sarhan, founder and CEO of 50 Park Investments, said in an interview. “And when emotions take over, the sky’s the limit.”

Betting on growth

There are many differences between Nvidia and Tesla, from the products they make to the personalities of the men running the companies. But the similarities are striking.

Nvidia’s rise from a niche chip maker to one of the world’s biggest companies is predicated on the assumption that its phenomenal sales growth last year has staying power. Tesla’s big breakout rally that took place in 2020 and lifted its valuation to well over $1.2 trillion was based on the assumption that electric cars would be adopted widely and quickly, and that the company that would dominate that market would be.

But reality has interrupted this story. The demand for electric vehicles slows down when the wave of enthusiastic first-time users has already bought, and it takes longer than expected for more price-conscious consumers who have avoided change to switch to the new technology. As a result, Tesla is down 31% from its peak last July and is one of the biggest percentage gains in the Nasdaq 100 this year.

“The driverless car has all this potential, the cyber truck and stocks are about to hit. Why? They lose market share and they lose margins. In the tech world, it’s the kiss of death,” said Sameer Bhasin, director at Value Point Capital.

For Nvidia, it’s too early in the hype cycle for a slowdown. The Santa Clara, Calif.-based company has delivered explosive results for four straight quarters, boosted by demand for its chips used to train large language models that power AI applications such as OpenAI’s ChatGPT.

After more than tripling last year, the stock has once again outperformed the S&P 500 index in 2024 with a 66 percent rise. Its market capitalization of more than $2 trillion trails only two US companies – Apple Inc. and Microsoft Corp.

Talk about the widespread use of artificial intelligence in various industries and companies brings to mind the excitement surrounding the Internet and the years leading up to the dot-com bubble. But unlike that era, when Internet companies were valued by new metrics like “clicks” while bleeding money, Nvidia is making huge profits. Net income jumped more than 500% to nearly $30 billion last year and is projected to double this year, according to data compiled by Bloomberg.

The risks are hidden

These big profits and sales, along with the company’s ability to consistently beat estimates, have helped keep valuation metrics covered. Still, Nvidia’s price-to-sales ratio is the highest in the S&P 500, at 18.

Currently, the semiconductor maker has a significant lead in the types of graphics chips that excel at crunching large amounts of data used in AI models. But its competitors are eager to grab some of the market. Advanced Micro Devices Inc. recently released a series of accelerators, and even Nvidia customers such as Microsoft Corp. are racing to develop the chips.

“If you really believe in this AI craze, you can visualize a future in 10 years where AI is embedded in many places, and you need these massive systems that use chips that only Nvidia can supply,” Sameer Bhasin said. CEO at Value Point Capital. “Even if the buying stops, the stock will hit.”

This is not to dismiss the disruptive power of electric cars or AI. But that raises the question of whether investors will pay for future growth that may never be achieved. Take the market darling of the dot-com era, Cisco Systems Inc. It’s still a successful company, but investors who bought the stock at its peak and held on are still waiting to recoup their losses — 24 years later.

“The bubble exists because the idea behind it is real,” said Cole Wilcox, managing director and portfolio manager at Longboard Asset Management. “But just because the general macro wave is real, it doesn’t mean that all these projects will become good investments. You have to be able to tell the winners from the losers.”

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