Nvidia Stock Soars on AI Hype, But Can It Avoid Tesla’s Fate?

Nvidia stock is one of the hottest stories in the market, as the chipmaker’s sales and profits soar on the back of strong demand for its artificial intelligence (AI) products. The company’s shares have gained 66% this year, after more than tripling in 2023, making it the third-largest US company by market value.

But the meteoric rise of Nvidia stock also reminds some investors of another tech company that once captivated the market with its vision of a disruptive future: Tesla. The electric vehicle (EV) maker saw its shares surge more than 700% in 2020, as it became the world’s most valuable carmaker. However, since then, Tesla has lost more than half of its value, as reality set in and competition intensified.

Is Nvidia stock destined to follow Tesla’s path, or can it sustain its growth and justify its lofty valuation? Here are some of the similarities and differences between the two companies, and the challenges and opportunities they face.

The Dream Factor

Both Nvidia and Tesla have benefited from the power of storytelling, as they tapped into the imagination of investors who are looking for the next big thing in technology. Nvidia stock is at the forefront of the AI revolution, as its graphics processing units (GPUs) are widely used to train and run complex algorithms that enable machines to perform tasks such as natural language processing, computer vision, and speech recognition.

Nvidia’s chips power some of the most advanced AI applications, such as OpenAI’s ChatGPT, a conversational system that can generate realistic and coherent responses.

Tesla, on the other hand, has been the poster child of the EV industry, as it pioneered the mass production and adoption of battery-powered cars. Tesla’s charismatic founder and CEO, Elon Musk, has also been a master of hype, as he promised to deliver innovations such as self-driving cars, solar roofs, and even colonizing Mars.

Both companies have created loyal fan bases and cult-like followings, as they positioned themselves as not just businesses, but as agents of change that can make the world a better place. As a result, many investors have been willing to overlook their flaws and risks and pay a premium for their stocks.

The Growth Factor

Another similarity between Nvidia and Tesla is their impressive growth rates, which have fueled their stock rallies. Nvidia stock has delivered four consecutive quarters of revenue and earnings growth of more than 50%, as it benefited from the surge in demand for its chips amid the pandemic and the rise of cloud computing.

Nvidia’s stock revenue reached $37 billion in 2023, up 124% from 2022, while its net income soared 513% to $29.9 billion. Analysts expect Nvidia stock to grow its revenue and earnings by another 100% and 96%, respectively, in 2024.

Tesla, meanwhile, has also posted strong growth in its vehicle deliveries and revenue, as it expanded its production capacity and entered new markets. Tesla delivered more than 900,000 vehicles in 2020, up 36% from 2019, while its revenue grew 28% to $31.5 billion. Tesla also achieved its first full year of profitability, with a net income of $721 million. Analysts project Tesla to increase its deliveries and revenue by 50% and 28%, respectively, in 2021.

Both companies have also been able to beat analysts’ expectations consistently, which has boosted their stock prices and investor confidence.

The Reality Factor

However, both Nvidia and Tesla also face significant challenges and uncertainties that could derail their growth and stock performance. For Nvidia, one of the main risks is competition, as other chipmakers are vying for a share of the lucrative AI market. Nvidia’s rival, Advanced Micro Devices (AMD), has recently launched its line of accelerators, which are designed to compete with Nvidia’s GPUs.

AMD has also gained an edge over Nvidia stock in the gaming market, as its chips are used in the latest consoles from Sony and Microsoft. Moreover, some of Nvidia’s customers, such as Microsoft, Amazon, and Google, are developing their own AI chips, which could reduce their reliance on Nvidia stock.

Another risk for Nvidia stock is valuation, as it trades at a very high multiple of its sales and earnings. Nvidia has a price-to-sales ratio of 18, the highest among the S&P 500 companies, and a price-to-earnings ratio of 75, well above the industry average of 35. Nvidia’s valuation reflects its strong growth prospects, but it also leaves little room for error or disappointment. If Nvidia’s growth slows down or misses expectations, its stock could suffer a significant correction.

Tesla, on the other hand, has been facing a slowdown in demand and a loss of market share, as the EV industry becomes more crowded and competitive. Tesla’s global EV market share fell from 29% in 2019 to 16% in 2020, according to EV-volumes.com, as more traditional carmakers and new entrants launched their own EV models.

Tesla’s sales growth in China, its largest and fastest-growing market, has also been hampered by regulatory issues, quality complaints, and local rivals. Tesla’s ambitious plans to launch new products, such as the Cybertruck, the Semi, and the Roadster, have also been delayed, raising doubts about its ability to innovate and deliver.

Tesla’s valuation is also a major concern, as it trades at a huge premium to its peers and its own fundamentals. Tesla has a price-to-sales ratio of 13, the highest among the global carmakers, and a price-to-earnings ratio of 350, which is astronomical compared to the industry average of 15.

Tesla’s valuation is based on the assumption that it will dominate the EV market and become a leader in other areas, such as autonomous driving, battery technology, and solar energy. But if Tesla fails to live up to those expectations, its stock could face a harsh reality check.

The Lesson Factor Of Nvidia Stock

The comparison between Nvidia and Tesla shows that both companies have a lot in common, but also a lot of differences. Both companies have been driven by a vision of a technological transformation, and have delivered impressive growth and returns. But both companies also face significant risks and challenges and have very high valuations that could be hard to justify.

The lesson for investors is to be careful not to get carried away by the hype and the dream and to be realistic and rational about the potential and the pitfalls. As history has shown, many tech companies that were once seen as unstoppable and invincible have eventually fallen from grace, as they failed to meet the expectations of the market and the reality of the competition.

As Cole Wilcox, CEO and portfolio manager at Longboard Asset Management, said, “The bubble exists because the underlying idea is real. But just because the general macro wave is real, it doesn’t mean that all of these ventures are going to turn out to be good investments. You will have to be able to separate the winners from the losers.”