Smart beta pioneer, Rob Arnott, has called out the Nvidia share price as too big to succeed despite strong fundamentals for the AI chip king.
In a typically history-based takedown, Arnott – along with Research Affiliates (RAFI) colleagues, Chris Brightman and Thomas Verghese – says in a note that the Nvidia narrative mirrors the turn-of-the-century ‘new paradigm’ hysteria that pushed dozens of technology names into the stratosphere only for most to crash back to earth.
Investors who bought the top 10 tech companies at the peak prior to the 2000 rout lost half relative to the S&P500 index almost immediately and remain about 30 per cent behind the benchmark in 2023, the RAFI report says.
But a more-diversified 1999-vintage tech portfolio of the biggest 40 companies in the sector, which captured ultimate winners such as Amazon and Qualcomm, fared better over the long term.
“… those next 30 names include some important winners, who began to make their presence known beginning in 2011,” the paper says. “After 20 years in the doghouse, the tech-bubble-enthusiast who owned the top 40 names is finally ahead of the S&P indexer and remains modestly ahead to this day.”
The experience should serve as a warning to investors who have bid up Nvidia almost 280 per cent since last November, betting the chip-maker to the AI stars would dominate the market indefinitely.
In addition to falling for the ‘big market delusion’ that competitors won’t emerge and current performance expectations are rational, investors are also overplaying Nvidia as a ‘safe’ hand in the AI game.
“As we’ve documented repeatedly, investors should be less enamored of ‘too big to fail’ and more alert to the risk that the largest companies are often ‘too big to succeed’,” the RAFI analysis says. “Competitors and regulators love to take the largest companies down a notch. Customers stop rooting for an underdog when it becomes a top dog. The very competitive practices that allowed a company to become dominant are suddenly seen as anticompetitive and predatory.”
While Arnott is on board with the notion of AI as a potential revolution for both economies and societies, he says the lessons of the 2000 tech bubble show while a few companies may deliver on the hype, most will fail – and investors don’t know which is which.
“Today, according to Bloomberg, Nvidia’s P/E sits at 110, half of Cisco and Qualcomm at their 1999-2000 peaks,” the RAFI paper says. “Even so, we believe that—like Cisco and Qualcomm during the dot-com bubble—Nvidia is a company with terrific long-term business prospects and its stock price may be a bubble.”