In the ever-dynamic world of the stock market, few events spark as much intrigue as a charismatic surge in stock prices. Recently, Nvidia Corporation has captured investor attention with surging stock prices, pushing the S&P 500 index to new heights. Yet, this surge conjures memories of Tesla, another tech darling that once led the charge in electric vehicle innovation. Tesla's stock saw meteoric rises fueled by high hopes, only to be met with equally dramatic declines when reality set in for investors.

Back in 2017, Tesla Inc. was riding high on the belief that electric vehicles were poised to revolutionize transportation globally. Investors flocked to Tesla, propelling its market capitalization past long-established automotive giants such as General Motors and Ford. At that time, Elon Musk's brainchild seemed to be on the path to becoming the most valuable automaker in the United States—indeed, some analysts went as far as to predict that Tesla would become the next Apple Inc.

However, fast forward to today, and Tesla's stock has plummeted over 50% from its peak in 2021. This decline mirrored the drop in other electric vehicle stocks that had previously soared alongside Tesla. Such declines serve as a cautionary tale for Nvidia investors, who now find themselves lured into what many perceive as an audacious bet on the future of artificial intelligence.

Adam Salan, founder and CEO of 50 Park Investments, aptly pointed out in an interview: “We repeatedly witness that when investors are captivated by the current technological innovations, logic is often cast aside. When emotion takes precedence, stock prices possess limitless potential for increase.”
A Slowdown in EV Demand

On the surface, Nvidia and Tesla appear worlds apart—from their product offerings to the characteristics of their leadership. Yet, upon closer examination, one cannot help but notice striking similarities in their trajectories.

Nvidia has evolved from a niche chip manufacturer to one of the largest companies in the world, driven by phenomenal sales growth over the past year, which seems poised to continue. In 2020, as Tesla’s stock soared, its market value eclipsed $1.2 trillion, a surge largely based on the assumption that electric vehicles would rapidly gain acceptance and that Tesla would emerge as a dominant force in that space.

However, the actual transition to electric vehicles has proven to be less straightforward. Early adopters snagged electric cars, yet many consumers remain hesitant due to cost concerns and a general reluctance to embrace change. Consequently, demand for electric vehicles has tapered off. By July 2023, Tesla's share price had plummeted by 31% from its recent peak, marking it as one of the worst-performing stocks in the Nasdaq 100 Index this year.

Samir Bhasin, principal at Value Point Capital, remarked, “Despite potential projects like autonomous cars and the Cybertruck, Tesla's stock is feeling the pinch. Why? They're losing market share and profits are declining. In tech, that's a profound blow.”

For Nvidia, it remains too early to pinpoint any signs of downturn arising from a speculative bubble. Located in Santa Clara, California, Nvidia has been raking in impressive performances for four consecutive quarters, largely fueled by soaring demand for its chips. These chips are critical in training the large language models that power AI applications like OpenAI's ChatGPT.

Nvidia's share price has more than doubled in 2023, with a reported 66% increase expected in 2024, positioning it as the top performer in the S&P 500 index. Its market value has soared to over $2 trillion, trailing only corporate titans Apple and Microsoft.

The narrative surrounding AI—its application across various industries and companies—invokes memories of the internet frenzy and the bubble years prior to the dot-com crash. Back then, Internet companies’ valuations were often tethered to unsustainable metrics like "eyeballs" and traffic metrics, while Nvidia has posted substantial profits. According to data compiled by Bloomberg, Nvidia’s net income surged over 500% in 2023 to nearly $30 billion, with projected growth forecasted to double this year.
The 'AI Frenzy'

The robust profits, combined with stellar sales and Nvidia’s capacity to consistently exceed expectations, keep the company’s valuation metrics within reasonable bounds. Despite this, Nvidia boasts a price-to-sales ratio of 18, which remains the highest among the S&P 500 stocks.

Currently, Nvidia holds a substantial competitive edge in the graphics chip market, where its chips can process vast data sets required for AI models. Yet, its competitors are sharpening their tools, ready to encroach on its market share. Advanced Micro Devices Inc. has recently launched a series of accelerator products, and even clients like Microsoft are jumping in to develop chips.

Bhasin from Value Point Capital stated: “If you truly believe in this AI frenzy, you can envision a future ten years down the road where AI will find applications across varied sectors, and you will require those large systems that Nvidia alone can provide chips for. Even if investors contemplate pausing their buying, it can impact the company’s stock price.”

This reality does not discount the transformative potential of either electric vehicles or artificial intelligence. However, it does raise critical questions about whether investors are shelling out for growth prospects that may never materialize. Take, for instance, Cisco Systems Inc.—a darling of the dot-com bubble that, while a successful company today, has left those who invested at its peak still waiting to recover their losses more than two decades later.

Kyle Wilcox, CEO and portfolio manager at Longboard Asset Management, concludes: “Bubbles arise when the underlying premise is indeed real. But real macro trends do not mean every company is a stellar investment choice. One must possess the discernment to differentiate between the good and the bad.”