Nvidia stock, AI not yet in a bubble - Goldman Sachs

Nvidia stock (NASDAQ:NVDA) has skyrocketed more than 520% since the start of 2022 and 84% this year alone. As a result of this blazing growth, the chipmaker is the third most valuable company in the world today, only behind Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL).

Nvidia stock rally fuels debate

Among other catalysts, Nvidia stock’s explosion over the past year or so is mainly attributed to its vital role in the ongoing artificial intelligence (AI) boom.

Just as the engine was the pivotal technology that powered the automotive industry, propelling it forward and transforming every aspect of transportation and manufacturing, Nvidia's high-end graphics processing units (GPUs) serve as the critical foundation powering leading AI products such as OpenAI’s ChatGPT.

But while the growth of Nvidia stock and the AI sector is no short of remarkable, the pace at which it is happening and the broader economic context have led investors and analysts to wonder if this could be another market bubble.

In other words, they are questioning whether the high valuations for the chipmaker and other AI-driven tech giants can be sustained in the long term.

Though there are some who are convinced it’s a bubble, Citi analysts believe “this is one of the rare times it’s different,” suggesting that 2024 “is shaping up to be a repeat of 1999.”

Discussing whether AI is in a bubble phase, a Citi analyst commented, “Yes…but it could last into 2025.”

“We would note that these bubbles can last a year or longer, similar to what happened in 1999 with the tech bubble,” he said.

The analyst mentioned that things back then ended poorly, and the current situation could also end poorly.

Despite this, the analyst noted that market valuations might remain high for an extended period, as long as the financial forecasts continue to show rapid growth. He emphasized that, at the time, market valuations did not start to decline until well into the cycle.

Is AI a bubble? Goldman says no

Weighing in on this matter, Goldman Sachs strategists said the AI optimism within the U.S. stock market is quite high, however, it has not yet reached the peaks seen during the Tech Bubble or the period following COVID-19.

Notably, the strategists’ projected long-term growth rate has increased to 11%, surpassing the historical average of 9%. Still, this rate remains beneath the 16% witnessed during the Tech Bubble and the 13% observed in late 2021.

Similarly, for the top 10 Technology, Media, and Telecom (TMT) stocks, Goldman analysts have observed that the expected earnings per share (EPS) growth for the third fiscal year averages 15%.

This figure is slightly higher than the median of 11% for the S&P 500. Nonetheless, it doesn't match the 24% expected growth rate of a typical TMT stock in March 2000 or the 18% seen in October 2021.

“Third, the valuation of the largest 10 TMT stocks equals 28x, which pales in comparison to the peak of the Tech Bubble (52x) and late 2021 (43x),” they added.

Regarding Nvidia specifically, the stock’s price-to-earnings (P/E) ratio has remained approximately the same since the beginning of 2023, Goldman strategists pointed out, “with nearly all of its return attributable to a higher stream of earnings.”