By Artificial Intelligence (AI) industry has been the most important theme in the market in the last two years, helped by the popularity of products like OpenAI’s ChatGPT, Anthropic’s Claude, and Elon Musk’s X.ai.
This popularity has led to a sharp increase in popularity of these companies and a surge in their valuations. The most recent report is that Apple and Nvidia (NVDA) were considering making a big investment in ChatGPT that will value the company at over $100 billion.
Anthropic, which is backed by Amazon, has a valuation of over $8.4 billion while X.ai is valued at over $24 billion.
Other smaller AI startups have also seen their valuations jump. For example, Perplexity has raised over $250 million at a valuation of about $3 billion. Mistral, a French AI company, has achieved a valuation of over $6 billion.
The same is happening among publicly traded companies. Nvidia’s market cap has surged to over $3 trillion while Broadcom has over $750 billion. Other firms like Meta Platforms and Alphabet have also seen a substantial surge in valuation.
Nvidia earnings
Nvidia has become the biggest player in the AI industry because of its highly advanced GPUs. Its GPUs like H100 and H200, which are used to train large data models. It has also become a popular name because of its Compute Unified Device Architecture (CUDA), which lets developers to use its chops for general-purpose processing.
The most recent financial results showed that demand for Nvidia’s solutions is rising. Its revenue jumped from over $13.5 billion in Q2’24 to $30 billion in Q2’25. The revenue was also higher than the $26 billion it made in the first quarter of this year. Most notably, Nvidia’s quarterly revenue has also jumped above the $21 billion it made in the whole of 2021.
Nvidia also hopes that its business will continue doing well in the next two quarters. Its revenue is expected to come in at $32 billion, higher than the $18 billion it made in the same period in 2023.
In the earnings call, the management noted that supply of its GPUs was still lower than demand as companies like Microsoft, Alphabet, and Amazon spend billions of dollars on data center GPUs. Countries like Saudi Arabia, the United Arab Emirates, and China are also buying substantial GPUs as the AI race continue.
Nvidia and other AI stocks have dropped
Nvidia’s stock, however, has suffered a sharp reversal after its financial results as investors remain concerned about its future growth. It was trading at $120, down by over 15% from the highest point this year.
Other AI stocks have also dropped in the past few months. For example, SoundHound, a company that Nvidia invested in a few months ago, has dropped by over 52% from its highest point this year. Similarly, C3.ai shares have fallen by over 39% from the YTD high.
Super Micro Computer (SMCI) and AMD have also dropped sharply this year. Broadcom (AVGO), a company that will publish its results this week, has also moved into a correction after falling by over 11% from the year-to-date high.
A key concern among investors is that the AI boom may turn like the other booms that happened a few years ago.
The most popular of these booms is the dot com bubble that happened in the early 2000s. At the time, most companies were changing their business strategy to leverage the dot com theme. Cisco even became the biggest company in the world at the time before it all came tumbling down.
The other popular boom has been the electric vehicle industry. At its peak, Tesla had a market cap of over $1 trillion while firms like VinFast and Rivian had a valuation of over $100 billion. Rivian was even bigger than Ford and General Motors.
The EV boom has faded, with most companies being sharply lower than their all-time high. Tesla has dropped by over 50% from its record high while companies like Rivian, Lucid, and VinFast are doing much worse.
Another example is the cannabis industry, where companies like Tilray Brands, Aurora Cannabis, Canopy Growth, and Curaleaf have also crashed by double-digits from their all-time highs.
Nvidia stock is highly overvalued
The other risk for companies like Nvidia is that demand for its GPUs will not remain at an elevated level forever. For one, big data center companies will likely start slowing down their investments.
Additionally, there are substantial valuation risks. Nvidia has a forward P/E ratio of 43, higher than the sector median of 30. Its non-GAAP forward P/E ratio is 42, higher than the industry median of 24.
Apple (AAPL), another AI company, has a market cap of over $3.4 trillion and a forward P/E ratio of 34 even as its sales growth slows. The company has a forward P/E ratio of just 2.13%, lower than the S&P 500’s average of 10%.
Therefore, there is a risk that many AI companies will continue falling in the coming months as the growth slows.
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