Is AI a new dotcom bubble? Will Nvidia and Arm see shares crash?

Nostalgia for the music and fashion of the nineties has seen a revival – partly thanks to the Netflix drama One Day.

But until this week, less attention was paid to the less pleasant events of that era, such as the bursting of the dot.com bubble, which saw tech stocks like Cisco collapse at the end of the decade.

However, this defeat has often been mentioned after Wednesday’s record results from what Goldman Sachs calls “the most important stock in the world”: Nvidia, the company with a central role in the industrial revolution in artificial intelligence (AI).

The Californian semiconductor manufacturer was founded in 1993 amid the excitement of dot.com. Its first customers were video game designers, and the name is a combination of NV, which stands for “next vision,” and invidia, the Latin word for envy.

Are these predictions of a repeat of the dot.com bust fueled by envy among those who didn’t enjoy Nvidia’s 45 percent share price rise this year to $694? In 2023 the increase was 240 percent.

Could there be parallels between the prospects for Nvidia and the fate of 1990s technology enthusiast Cisco? The shares never recovered from their dot.com decline.

These comparisons are made even though Nvidia controls about 90 percent of the market in GPU (graphic processing unit) chips needed for generative AI, which can produce text and images that resemble those of humans.

Demand for these chips, which cost about $50,000 each, is insatiable. Microsoft and other tech giants may be developing their own technology. But for now, “If AI is a gold rush, Nvidia is selling the picks and shovels,” as James Thomson, manager of the Rathbones Global Opportunities fund, puts it.

More innovation is on the horizon, with Nvidia founder and CEO Jensen Huang promising “a whole bunch of things we’ve been working on.”

Huang, 61, is known for his perfectionism and still leads the $1.8 trillion group with the warning that “our company will go bankrupt within 30 days.”

His expertise is one of the reasons why 60 analysts rate Nvidia stock as a Buy. The average target over a twelve-month period is €734, but an optimist foresees a jump to €1,200.

Hundreds of thousands of retail investors, including myself, have an interest in such predictions, as Nvidia shares are owned by funds and trusts such as Alliance Trust, Allianz Technology, Blue Whale Growth, F&C, Polar Capital Technology, Rathbone Global Opportunities and Scottish Mortgage.

The signs are that Nvidia will continue to consolidate its dominant position in the AI ​​industrial revolution thanks to its strengths on a number of fronts.

Cuda, Nvidia’s proprietary computing language, has been used to build the digital libraries of information from which generative AI collects data to deliver results.

Question: Doom 3 screenshot using an Nvidia graphics chip

As a result, Blue Whale Growth manager Stephen Yiu disputes the claim that Nvidia will suffer Cisco’s fate. The fund first invested in the company in June 2021.

He says, “At the end of March 2000, just before the dot.com bubble burst, Cisco stock was trading at 130 times earnings.

‘This compares to 32 times for Nvidia today, which is about the same as Amazon, Apple and Microsoft – and half Tesla’s multiple of 61.’

Yiu also highlights the digital adoption gap between the dot.com boom and 2024.

He says: ‘In 2000 it could take an hour to buy something from Amazon. Subsequently, people have acquired mobile phones and laptops, whose use for banking, work, shopping and entertainment allows the accumulation of the data stored in the cloud that generative AI relies on.”

This data provides the tech giants with a wealth of opportunities that they can exploit using Nvidia chips.

Yiu says, “Microsoft is selling its Copilot generative AI suite to Windows customers for $30 per month.

‘Meta can put together advertisements that individually appeal to its Facebook and Instagram users – for which advertisers pay extra.’

Thomson says generative AI has been described as a ‘FOMO’ (fear of missing out) technology. He says, “Company executives fear losing relevance if they don’t use AI effectively.”

But he says Nvidia could face challenges. “Nvidia was the best performer in our fund over the past year, but we have taken profits on a significant portion of the position as we believe the upside potential has obviously become more limited from here on out.”

The dot.com episode may not be repeated. But its lessons still apply, such as the risk of putting too much faith in one stock. Nvidia is a hugely important stock that you should have exposure to through a fund or directly. There is almost certainly more upside potential in the stock. But the journey will likely be marked by the thrills and spills of a 1990s video game.