Quick Bites | Are AI stocks in a bubble?

Last week, chipmaker Nvidia hit USD 1 trillion market cap as it garnered attention as one key focus of the Artificial Intelligence wave. The Silicon Valley company joined an elite group of US-listed companies including Apple, Microsoft, Amazon, and Alphabet.

Indeed, there has been a surge of enthusiasm across Wall Street for companies seen to benefit from the latest developments in artificial intelligence.

Nvidia’s shares rose sharply after its chief executive Jensen Huang launched a new supercomputer and struck new AI alliances with companies including WPP and SoftBank. Those moves built fresh momentum after Nvidia impressed investors and analysts by projecting its sales would rise to $11 billion in the three months ending in July, exceeding Wall Street’s previous forecasts by more than 50%.


Source: Visual Capitalist


Silicon Valley based Nvidia began 30 years ago targeting the niche market of 3D computer graphics. Its chips power AI applications including ChatGPT, as big tech companies and cloud computing providers race to upgrade their data centre technology for what Huang declared “the tipping point of a new computing era.”

High-powered chips such as Nvidia’s H100 have become essential to building generative AI systems that are capable of creating text and images that closely resemble what humans can produce. Generative AI promises to unleash new kinds of productivity tools but also threatens to shake up jobs in industries such as media and education.

Other companies seen as benefiting from the shift to AI have also seen their shares rocket this year, including Microsoft, Palantir, and AMD. However enthusiastic one is about prospects for AI, the historical pattern suggests that markets become “overly exuberant” about new technologies or themes, and push valuations way past what appears to be rational to more sober investors.

Wharton finance professor Jeremy Siegel doesn’t see the mania around AI stocks as a bubble — and said it’s impossible to predict where these mega-cap tech stocks will peak. “Long term I would say that they were probably slightly overvalued. But for the short term, we know momentum can carry stocks far higher than their fundamental value and no one can predict how high they might go.”

Siegel contrasted the current AI boom with the dot-com bubble of the 1990s where there were “tremendous valuations from companies that had no earnings.” He added that Nvidia, whose recent earnings he described as “blowout,” was a “real, good company.”

Siegel added, “As we all know, the top eight or nine companies have accounted for all of the gain of the S&P 500 this year, the other 490 have been flat or down.”

The S&P 500 is up 10% year-to-date, propelled by gains in Meta and Nvidia, each of which has jumped over 115%. Microsoft, Apple, Amazon, and Alphabet have advanced over 39% each. Nasdaq is up 25% year-to-date.



Disclaimer: Clime Asset Management Pty Limited | AFSL 221146 | ABN 72 098 420 770.  The information provided in this post is intended for general use only. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information contained therein. Please consider the relevant disclosure document/s before investing in one of our products. Investment in securities and other financial products involves risk. An investment in a financial product may have the potential for capital growth and income but may also carry the risk that the total return on the investment may be less than the amount contributed directly by the investor. Investors risk losing some or all of their capital invested. Past performance of financial products is not a reliable indicator of future performance or returns.