According to Rebellion Research, the AI investor rush is reminiscent of the tulip bubble of the 17th century. Reuters/Cris Toala Olivares
Nvidia’s share price has become a bubble, according to think tank Rebellion Research.
Stocks could soon crash like the tulips of the 17th century or the dot-com companies of the 1990s, the think tank said.
The semiconductor giant is up 180 percent this year thanks to the rise of generative AI.
Nvidia shares have risen so much this year that the semiconductor giant now trades at a bubble valuation reminiscent of 17th-century tulips and late 1990s dot-com companies, the think tank said Rebellion Research. Shares have risen 180 percent to $410, but the investment management firm said earlier this month that the stock is now heavily overvalued and could crash at any time.
“Historically, financial markets have experienced numerous asset bubbles, from the Tulip Mania in the 17th century to the recent dot-com bubble in the late 1990s and early 2000s,” write Rebellion analysts. “The recent performance of Nvidia stock, driven by enthusiasm for generative AI and rising profits, appears to have many of the hallmarks of such speculative bubbles,” they added. “We think Nvidia is a great company… but perhaps only at $300 per share.”
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Generative AI programs like Chat GPT run on high-performance, specialized graphics processing units (GPUs) – and Nvidia has one large share of this market. Nvidia has released back-to-back stellar quarterly results showing demand for its products surging thanks to AI enthusiasm, and investors have been piling into stocks in response.
That has pushed Nvidia to a trillion-dollar valuation and established the company as a member of the “Magnificent Seven” of mega-cap tech companies. However, it remains to be seen how “practical and profitable” AI can be, and that makes Nvidia stock vulnerable at its current price, Rebellion said.
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The price-earnings ratio is also overvalued
The company also appears overvalued at its current price-to-earnings ratio and could face problems if the Federal Reserve keeps interest rates higher for longer to combat inflation, strategists warned.
“In view of historical price-earnings ratios and the looming change in monetary policy, investors should be cautious,” said the strategists. “As with any bubble that has existed before, the factors that led to its rise are often the seeds of its eventual bursting.”
Rebellion, which uses probabilistic models to forecast markets, compared the chipmaker’s valuation to several significant bubbles over the past 400 years.
These included the Dutch tulip boom of the 1630s – when contract prices for tulip bulbs skyrocketed, in what has been called the first speculative financial bubble – as well as the recent dot-com crash, which caused a massive sell-off in the tech-heavy market between March 2000 and October 2002 Nasdaq Composite triggered.
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