Nvidia becomes Tesla's successor as market flips from EV to AI

After more than tripling last year, the stock in 2024 is again the best performer in the S&P 500 Index, with a 66% advance. Its market value of more than $2 trillion trails only two U.S. companies — Apple Inc. and Microsoft Corp.

The talk of broad-based use of AI across industries and businesses brings to mind the excitement around the internet and the years leading into the dot-com bubble. But unlike that era, when internet companies were being valued on new metrics like “clicks” while bleeding cash, Nvidia is pumping out massive profits. Net income jumped more than 500% to nearly $30 billion last year and is projected to double in the current year, according to data compiled by Bloomberg.

Risks are lurking

Those big profits and sales, along with the company’s ability to continually beat estimates, has helped keep a lid on valuation metrics. Still, Nvidia has the highest price-to-sales ratio in the S&P 500 at 18.

Currently, the semiconductor manufacturer has a sizable 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 a piece of that market. Advanced Micro Devices Inc. recently released a line of accelerators, and even Nvidia’s 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 a lot of places, and you need these massive systems running chips that can only be delivered by Nvidia,” said Sameer Bhasin, principal at Value Point Capital. “Even if there’s a perception of a pause in buying, the stock will get hit.”

None of this is meant to dismiss the disruptive power of electric cars or AI. But it does raise the question of whether investors are paying for a future growth that may never arrive. Take a market darling of the dot-com era, Cisco Systems Inc.. It 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, CEO and portfolio manager at Longboard Asset Management. “But just because the general macro wave is real, it doesn’t mean that all of these ventures are going to turn out to be good investments. You will have to be able to separate the winners from the losers.”