Nvidia’s rise echoes Tesla’s 2020 rally, giving investors pause (2024)

Those shares belong to Tesla Inc., which sparked its own mania in 2017 when investors bet that electric vehicles would take over the world. Back then, Elon Musk’s company was a phenomenon, surpassing established automakers such as General Motors Co. and Ford Motor Co. in market capitalization to become the largest automaker in the United States. Some analysts looked beyond the industry and called it “the next Apple Inc.”

Now, Tesla stock is down more than 50% from its 2021 peak, and other EV stocks that rose with it are shadows of their former selves. All of which should be sobering for Nvidia investors who see the stock as an open-ended bet on the future of AI.

“We have seen time and time again that when investors fall in love with the idea of ​​the technological innovation of the moment, 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 a 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 staying power. Tesla’s big rally, which occurred in 2020 and put its valuation well above $1.2 trillion, was based on the assumption that electric vehicles would be widely and rapidly adopted, and that it would be the company that would dominate that market.

But reality has interrupted that story. Demand for electric vehicles is slowing as the wave of enthusiastic early adopters has already purchased them, and more price-conscious and change-averse consumers are taking longer than expected to convert to a new technology. As a result, Tesla is down 31% from its recent high last July and is one of the biggest percentage decliners in the Nasdaq 100 index this year.

“There is all this potential around the driverless car, the cybertruck and the stock is being affected. Because? They are losing market share and they are losing margins. In the technology world, that is the kiss of death,” said Sameer Bhasin, director at Value Point Capital.

For Nvidia, it’s too early in the hype cycle for there to be any signs of slowing down. The Santa Clara, California-based company has delivered spectacular results for four consecutive quarters, driven by what appears to be insatiable demand for its chips used to train large language models that power artificial intelligence applications like OpenAI’s ChatGPT .

After more than tripling last year, the stock in 2024 is once again the best performer in the S&P 500 index, with an advance of 66%. Its market value of more than $2 trillion is behind only two American companies: Apple Inc. and Microsoft Corp.

Talking about the widespread use of AI in industries and companies reminds us of the enthusiasm around the Internet and the years before the dotcom bubble. But unlike that era, when Internet companies were valued by new metrics like “clicks” while bleeding money, Nvidia is generating massive profits. Net income rose more than 500% to nearly $30 billion last year and is projected to double this year, according to data compiled by Bloomberg.

The risks lurk

Those big earnings, and the company’s ability to continually beat estimates, have helped keep its projected price-to-earnings ratio in check as Wall Street analysts continue to raise their estimates. Still, at 18 times projected earnings, it is the most expensive stock in the S&P 500 and is priced close to Tesla at its peak.

Currently, the semiconductor maker has a considerable lead in the types of graphics chips that excel at processing large amounts of data used in AI models. But its competitors are eager to get a piece of that market. Advanced Micro Devices Inc. recently launched 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 envision a future 10 years from now where AI will be embedded in many places and you will need these massive systems running chips that can only be delivered by Nvidia,” said Sameer Bhasin, director at Value Point Capital. “Even if there is a perception of a pause in buying, stocks will be affected.”

None of this is meant to discount the disruptive power of electric cars or AI. But it does raise the question of whether investors are paying for future growth that may never come. Like Cisco Systems Inc., a market darling of the dot-com era, 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 after.

“The bubble exists because the underlying idea is real,” said Cole Wilcox, CEO and portfolio manager at Longboard Asset Management. “But the fact that the general macro wave is real does not mean that all of these companies will turn out to be good investments. You will have to be able to separate the winners from the losers.”