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Nvidia Corp.<\/a>\u2019s\u00a0rise\u00a0is captivating the stock market and driving the S&P 500 Index to new highs. But it also raises cautionary reminders of another investor darling that soared on dreams of a technological transformation, only to tumble back to earth when those hopes turned to disappointment.<\/p>\n That stock belongs to\u00a0Tesla Inc.<\/a>, which sparked its own mania in 2017 as investors bet that electric vehicles were going to take over the world. Back then,\u00a0Elon Musk\u2019s company was a phenomenon as it blew past established carmakers like General Motors<\/a> Co. and Ford Motor<\/a> Co. in market capitalization to become\u00a0America\u2019s biggest auto manufacturer<\/a>. Some analysts were looking beyond the industry and calling it \u201cthe next Apple Inc.<\/a>\u201d<\/p>\n Now, Tesla<\/a> shares are down more than 50% from their 2021 peak, and other EV stocks that raced higher with it are shadows of their former selves. All of which should be sobering for Nvidia<\/a> investors who see the stock as a limitless bet on an AI future.<\/p>\n \u201cWe have seen time and again that when investors fall in love with the idea of the technology innovation du jour, logic takes a back seat\u201d\u00a0Adam Sarhan, founder and CEO of 50 Park Investments, said in an interview. \u201cAnd when emotion takes over, sky is the limit.\u201d<\/p>\n There are plenty of differences between Nvidia and Tesla, from the products they make to the personalities of the men that run the companies. But the parallels are striking.<\/p>\n Nvidia\u2019s rise from niche chipmaker to one of the biggest companies in the world is based on the premise that its phenomenal sales growth over the past year has staying power. Tesla\u2019s big breakout rally, which occurred in 2020 and put its valuation well over $1.2 trillion, was pinned on the assumption that EVs would be adopted widely and quickly, and that it would be the company to dominate that market.<\/p>\n But reality has interrupted that story. Demand for EVs is slowing as the wave of enthusiastic first adopters have already bought, and more price-conscious, 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\u00a0biggest percentage decliners\u00a0in the Nasdaq<\/a> 100 Index this year.<\/p>\n \u201cThere\u2019s all this potential about the driverless car, the cybertruck and the stock is getting hit. Why? They are losing market share and they are losing margins. In the tech world that is the kiss of death,\u201d said\u00a0Sameer Bhasin, principal at Value Point Capital.<\/p>\n For Nvidia, it\u2019s too early in the hype cycle for any signs of a slowdown. The Santa Clara, California-based company has delivered blow-out results for four consecutive quarters, fueled by what appears to be insatiable demand for its chips used to train large language models that power AI applications like OpenAI\u2019s ChatGPT.<\/p>\n After\u00a0more than tripling last year, the stock in 2024 is again the\u00a0best performer\u00a0in the S&P 500 Index, with a 66% advance. Its\u00a0market value\u00a0of more than $2 trillion trails only two US companies \u2014 Apple<\/a> Inc. and Microsoft<\/a> Corp.<\/p>\n 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 \u201cclicks\u201d 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.<\/p>\n Those big profits, and the company\u2019s ability to continually beat estimates, has helped keep a lid on its price-to-projected-earnings-ratio as Wall Street analysts continue to hike their estimates. Still, at 18 times projected profits, it\u2019s the most expensive stock in the S&P 500 \u2014 and priced around where Tesla was at its peak.<\/p>\n 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<\/a> Inc. recently released a line of accelerators, and even\u00a0Nvidia\u2019s customers<\/a>\u00a0like Microsoft Corp. are racing to develop chips.<\/p>\n \u201cIf 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,\u201d said\u00a0Sameer Bhasin, principal at Value Point Capital. \u201cEven if there\u2019s a perception of a pause in buying, the stock will get hit.\u201d<\/p>\n 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? Just as a market darling of the dot-com era,\u00a0Cisco Systems Inc.<\/a>, is still a successful company, but investors who bought the stock around its peak and held on are still waiting to recoup their losses \u2014 24 years later.<\/p>\n \u201cThe bubble exists because the underlying idea is real,\u201d said\u00a0Cole Wilcox, CEO and portfolio manager at Longboard Asset Management. \u201cBut just because the general macro wave is real, it doesn\u2019t 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.\u201d<\/p>\n<\/div>\n\nBetting on Growth<\/h3>\n
Risks Are Lurking<\/h3>\n
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