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Since the launch of Chat GPT in early 2023, ai actions have become the only game in town. The promise of a new era of innovation and increased efficiency has helped drive the S&P 500 to successive all-time highs throughout 2024. Leading the charge has been NVIDIA (NASDAQ: NVDA). But now that its stock is trading at 36 times sales and 64 times earnings, I'm starting to wonder if it can ever grow to such a lofty valuation.
Bubble Features
One of the hallmarks of any bubble is the idea of the greater fool theory. When investors start to believe that the only thing that matters is the trading price, then alarm bells should ring.
The tulip mania of the 17th century is a classic lesson in what can happen when people abandon fundamental investment principles in favor of speculation and greed.
Another important characteristic of a bubble is that it absorbs everyone. After the collapse of the South Sea bubble in 1720, Sir Isaac Newton famously said: “I can calculate the movement of celestial bodies, but not the madness of people..”
<h2 class="wp-block-heading" id="h-tech-bubble”>tech bubble
The dot-com bubble of the late 1990s is a modern example of what can happen when stock prices diverge from underlying fundamentals.
The release of the Netscape browser in 1994 heralded the birth of the Internet. Within five years, companies were going public with nothing more than a PowerPoint presentation and a URL.
One fact about the evolution of the Internet that is completely lost today is that the companies that helped build it did not end up being the ultimate winners. The tastes of Vodafone and cisco succumbed to a new generation of business models led by companies like Alphabet, Appleand Goal.
today is different
The question for investors today is simple: are the early days of the ai revolution different from previous manias? I don't think it is.
Nvidia and the hyperscalers that depend on its chips, such as Google and microsoftThey are very profitable businesses, something that very few companies were in the year 2000. But of course, even a large company can make a bad investment. Even 25 years later, neither Vodafone nor Cisco have surpassed their mania highs.
In the early days of a new technology, one would expect to see an explosion of startups. But what is happening is that ai is becoming more and more centralized. The vast majority of Nvidia's revenue comes from a few large-cap companies within the Magnificent Seven.
Despite investing tens of billions of dollars each in Nvidia chips, Google, Microsoft and Meta have yet to see a return on investment. Will they ever do it?
Let me formulate a hypothesis about the unthinkable. What if today's generative ai models are pretty much the peak of a hype cycle? One fact is indisputable: no killer app has emerged. In fact, I'm starting to question whether large language models are even a real form of ai.
I don't know how the future of ai will develop. I believe ai will be transformative in the same way the Internet was. But I'm not willing to bet on Nvidia being at the center of all this; At least not at its current valuation.
