Are we in a tech bubble? Are companies like Nvidia way overvalued? Today we will explore these questions and I will give you my thoughts why I believe we are in a bubble.
Why I believe we are in a tech bubble?
To begin, I want to discuss the most popular stock on Wall Street right now, Nvidia. Nvidia is a tech company based out of Santa Clara, California that has become super popular due to its dominance in Artificial intelligence and semi-conductors. Many speculate that as demand for AI continues exploding, this will greatly benefit Nvidia as the company is well positioned to dominate in the tech space the next few years.
While Nvidia certainly looks like it has a bright future, Wall Street has been betting big on the company.
In 2023, the stock price rose, 239%. So far in 2024, its up 45%. In 2005, if you had invested $1000 in Nvidia, today you would have somewhere around $492,000.
Generally speaking, some believe Nvidia’s stock price is considered overvalued at $788(as of 2/25/2024). This isn’t because the company isn’t making a nice profit, it’s because that the stock price is really based on the potential of the company. The expectation in the future is that demand for AI chips will drastically increase and Nvidia, who holds a majority market share will be able to benefit tremendously.
It goes without saying Nvidia has done tremendously well financially and the next couple of years most wall street analysts expect the company to continue to dominate the AI and semiconductor market in the US. Right now, there is a strong belief that AI will dominate the next few years. However, others like me believe that we might need to pump the brakes on AI becoming a part of every industry and demand outpacing supply.
Many will be quick to point out that during the dot.com or tech bubble in the 90’s/early 2000s, many of the companies never made a profit and were able to raise millions through IPO offerings. They will say this time is different, Nvidia has been earnings boatloads of profits and quarter after quarter beating expectations. Many say the stock will go up to $1100 or higher.
However, the future growth of Nvidia is based on the expectation that AI will become a dominant part of society. I’m not so sure that this will happen and with good reason. If and when this occurs, Nvidia despite being a solid company thus far, could see their stock price collapse a significant amount. We’ve seen many buying Nvidia based on rumors and speculation and not fundamentals. This has helped propel the stock to become the most traded stock in 2024.
So, why do I think we are in a tech bubble?
There are several reasons.
- Technology companies are usually valued based on their innovation potential and not earnings. This sector has seen quite a bit of growth, but there’s good reason to assume that the growth will stop. This will cause many speculators to abandon ship, selling the stock, and could lead to more people selling. Many investors in stocks like Nvidia right now are looking to make a quick buck and are not interested in the long-term fundamentals.
- The second reason is the high concentration of just a few stocks driving such a large percentage of the market. In 2023, the magnificent seven (Google, Netflix, Facebook, Amazon, Apple, Nvidia and Tesla) drove almost by itself the market up 23%. The Magnificent seven compose 28% of the S&P 500 index. Today, the US tech sector comprises 1/3 of the US equity market, which is the highest it’s been since the dot.com bubble. As we can see, if the tech sectors fall, then it could bring down the rest of the market fairly easy.
There’s plenty of reasons to think that things could go sideways and tech companies, despite being solid companies appear to be overvalued. How much they fall and how fast could decimate the economy.
