Nvidia Stock Is on Fire, But How Long Will That Last?

Nvidia Corp.’s blowout second quarter, reported Wednesday, is a welcome counterpoint to the stock market’s sluggish performance since mid-July.

Flying high thanks to enthusiasm for artificial intelligence, Nvidia’s share price has tripled this year—and other AI-involved companies have benefited, as well.

But amid all the celebrating, there is an undercurrent of skepticism among some strategists about the longevity of the AI zeal and Nvidia’s continued rise. The question is how soon AI will be a strong force in the economy, instead of just a promising concept.

For the market as a whole, Nvidia’s stock gains are not sufficient to be much of a sparkplug. The S&P 500 has had mainly down trading days this month, and yesterday blipped up only 1.1%, in anticipation of strong Nvidia earnings; the company reported after Wednesday’s close. In Thursday morning trading, the index was back in the red, losing 0.75%.

Some view Nvidia’s market performance as a lot of hype. Its stock run is “remarkable to behold,” Bespoke Investment Group wrote in a commentary after the earnings release. Still, the firm pointed out that “it remains a very open question whether AI-fueled demand for chips can continue to run at the ridiculous pace it’s currently hitting amidst real questions over AI’s commercial future and broad utility.”

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Others criticize the stock as too expensive. The shares change hands at a lofty price/earnings ratio of 245. “Investors should not be chasing Nvidia stock, as it is way too expensive,” wrote David Trainer, CEO of research firm New Constructs LLC, in a research note. “The only time investors may consider buying Nvidia is if the stock dips below $100 per share.” Investors should wait to buy Nvidia stock, now at $477, when it declines below $100, he declared.

All the excitement around Nvidia in particular and AI in general is really ahead of itself, in the view of Dubravko Lakos-Bujas, J.P. Morgan’s head of U.S. equity and quantitative strategy. “In terms of AI driving massive productivity gains for the broader economy, yes, but like three years from now, four years from now,” he told CNBC Wednesday. “Not in the next 12 months.”

Nvidia’s stock run-up is relatively recent, starting this year with the onset of the hoopla over AI. During 2022’s route, the chipmaker’s stock suffered along with the rest of the tech sector and the market overall.

Nvidia stock, following the post-close earnings release yesterday, catapulted 6% in after-hours trading and was up 1.4% Thursday morning. In May, Nvidia became the first chipmaker to be valued at more than $1 trillion.

Certainly, Nvidia’s earnings report, for the period ending in July, was eye-popping. The company’s fundamentals are riding high as it is the main supplier of chips that support the growing use of AI systems. Nvidia’s revenue doubled from the year-before quarter and earnings shot up 854%.

Another beneficiary of the AI equity boom is Meta Platforms Inc., which has a big presence in the field. The Facebook parent’s shares have ballooned 145% this year. On Wednesday, ahead of the Nvidia earnings statement, they were up 2.3%.

Meta’s surge also raises questions about its staying power. “There was a really, really, really sharp price increase” and the stock is “overvalued,” Chrissy Bargeron, client portfolio manager for equities at Voya Investment Management, told Bloomberg.

Perhaps one day artificial intelligence itself will control stock trading in some rational, unemotional way. In human hands, in the estimation of Nvidia’s critics, the trading sometimes gets carried away.

Tags: Artificial Intelligence, Bespoke, Earnings, Meta, Nvidia, price earnings ratio, revenue, S&P 500, Stock

The Maryland State Retirement and Pension System reported a 3.14% investment return, net of fees, for the fiscal year ending June 30 to raise its asset value to $65.2 billion from $64.6 billion one year earlier. The performance was less than half the pension fund’s 6.8% assumed rate of return but beat its policy benchmark, which earned 2.20% during the period.

Public equity was the top performing asset class for the pension fund during the fiscal year, returning 13.77%, followed by its credit investments, which earned 5.99%. Cash investments returned 5.26%, while private equity returned 0.26%. Meanwhile, rate-sensitive investments and real assets were the worst performers for the portfolio, losing 3.70% and 3.43%, respectively, during the year, followed by multi asset and absolute return, which lost 1.55% and 1.37%, respectively.

The fund noted the fiscal year performance is reflective of multiple difficult market factors, including rising interest rates, persistent inflation, weak emerging market performance due to a slower-than-expected post pandemic recovery in China and the time delay for private market investments to reflect public market valuation changes. However, it also highlighted a resilient real economy and higher U.S. stock prices despite rising rates and pressures on the banking system.

Over the shorter term, the pension fund reported three- and five-year annualized returns of 8.23% and 6.93%, respectively, ahead of its benchmark’s returns of 7.07% and 6.28%, respectively, over the same time periods. Over the longer term, the portfolio reported 10- and 20-year annualized returns of 7.04% and 6.83%, respectively, while its benchmark had a 6.50% 10-year annualized return. The pension fund did not provide 20-year annualized return figures for its benchmark.

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“The board has adopted a diversified asset allocation that has achieved the long-term return targets with as little volatility as possible,” Maryland SRPS CIO Andrew Palmer said in a release. “The allocation includes a mix of assets that behave differently as markets ebb and flow to reduce volatility in any one period.”

Private and public equity investments have been the engines driving the pension fund’s returns over the past five and 10 years. MSRPS’ private equity investments have returned 17.16% and 16.42% over the past five and 10 years, respectively, whiles public equity investments have returned 7.04% and 8.41%, respectively, over the same periods.

As of the end of June, the pension fund’s asset allocation was 30.2% public equity, 21.9% private equity, 17.1% rate sensitive, 15.4% real assets, 8.7% credit, 5.9% absolute return, 0.4% multi asset and 0.4% cash.