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Ever since ChatGPT became the shiny new thing of the moment earlier this year, there has been one stock price that has really catapulted.
Key points:
- Nvidia's stock price has surged about 200 per cent since the start of the year
- Other tech stocks, including Microsoft and Meta, are catching that wave
- Analysts warn the stock prices may be overvalued
Nvidia (NASDAQ: NVDA) makes graphics processing units (GPUs), a computer chip that renders graphics and images by performing rapid mathematical calculations.
They are used in gaming and, more recently, to power artificial intelligence.
The company has been around since the early 1990s, but it wasn't until the rapid rise of ChatGPT, which is powered by tens of thousands of GPUs, that many non-gamers outside Silicon Valley had even heard of it.
Investors want to capitalise on the rapid growth in demand for AI, and Nvidia has been the clear winner.
"It's really being driven by this almost frenzy into AI that was percolating under the surface a little bit, but really came to the fore when Nvidia announced their earnings and really announced their forward projections that just blew everything out of the park," explained Matt Tuttle, CEO of US firm Tuttle Capital Management.
Roger Montgomery from Montgomery Investment Management said the technology being created by Nvidia wasn't just for gamers and AI.
"Nvidia released a chip called the H100, and large buyers such as Amazon are buying these chips in the tens of thousands," he said.
"That has increased revenue for Nvidia substantially and so they reported a 50 per cent jump in revenue in the last quarter, and consequently, that has spurred the rally."
Nvidia's stock price has shot up almost 200 per cent since the start of 2023 and it was worth around $US420 ($628) a share at the time of writing.
But Mr Tuttle doesn't think the price will stay there.
"I think it's overpriced," he said.
"Jim Cramer coined the term 'Magnificent Seven' for the seven stocks that are leading the market higher — I think they're overpriced."
Goodbye FAANG stocks, hello Magnificent Seven
Until recently, the big tech stocks on the Nasdaq, which drove most of its activity and, for that matter, the broader S&P 500 daily market moves too, were known as the FAANG stocks.
They were Facebook (now Meta, NASDAQ: META), Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Netflix (NASDAQ: NFLX) and Google (now Alphabet, NASDAQ: GOOGL).
But this month Jim Cramer, the host of Mad Money on financial news network CNBC, declared there were now seven market leaders, naming them the Magnificent Seven.
They are FAANG originals Apple, Amazon, Meta and Alphabet with the addition of Nvidia, Microsoft (NASDAQ: MSFT) and Tesla (NASDAQ: TSLA).
Mr Tuttle thinks they are getting swept up in exuberance and are overpriced.
"I think things are extended. I don't see how the second half of the year for those seven stocks can be the same as the first half, so I would be really careful here," he warned.
"I think if you were coming in saying, 'Hey, I want to buy these stocks,' I would wait for some sort of pullback with the understanding that could get more extended, you might not get a pullback."
Mr Montgomery observed the seven companies had seen much more significant growth compared to other stocks.
"They're up collectively 50 per cent, year to date, and that compares to the rest of the companies in the MSCI US Index, which are unchanged," he said.
The MSCI US Index measures the performance of 625 large and mid-cap companies in the US, covering about 85 per cent of the overall market capitalisation.
"It is an incredibly narrow band of companies that are driving all of the gains in the major indices," Mr Montgomery added.
"This is largely some enthusiasm for AI, and the transformative effects of that technology.
"The jury's out on just how transformative this technology will be."
So is this a bubble and is it about to burst?
Despite all the talk and apparent adoption of AI, there are many regulatory matters and risks government and business want to see ironed out.
"We do think that it's going to take quite some time for generative AI and large language models to sort of get full enterprise adoption," UBS analyst Michael Briest told The Business.
"There are certainly barriers to that, around regulation and compliance, but this is definitely a step change in AI developments and a meaningful advance.
"I think a lot of regulated industries such as banking will have to put some guardrails around adoption.
"Data and client confidentiality is very important, so we think this is probably going to take a couple of years."
Mr Briest agreed the current prices of some of the stocks swept up in the AI wave had grown prematurely.
"It does take a little while to get everything in place in order to really see the benefits, and that may mean that some of the hope that's embedded in share prices has to pause for a little bit while we see the benefits come through."
Mr Montgomery does not believe AI will suffer a similar fate to fads in the past.
"There is no doubt businesses will reorient around this technology," he said.
"Whether or not investors actually make money at current prices is another thing.
"When you look back at the invention of the horseless carriage, or commercial air travel, or the television, in many instances, technology that was transformative benefited consumers, but it didn't necessarily make a lot of money for their investors."