Before we read too much into Nvidia’s $750+bn share price slide, let’s put it in context. Yes, the shares fell by 13 per cent in three days either side of June 24, 2024, easily meeting the usual definition of a correction. But let’s not forget that they had risen by 78 per cent since April. A company that was already one of the biggest in the world almost doubled in two months to briefly become the largest ever. It is hardly surprising that it should have paused for breath.
Alongside the focus on Nvidia, there’s been a lot of talk about Cisco this week. It’s not hard to see why. The share price chart of the company that came to symbolise the internet mania of 25 years ago looked uncannily like Nvidia’s until its customers stopped spending after the bubble burst in March 2000. Like Nvidia, its shares had grown ten-fold in a couple of years. Within a year it had lost more than 80 per cent of its value.
I don’t think that is the template for Nvidia. But I may be wrong. I have no idea how the artificial intelligence revolution will pan out or who its biggest beneficiaries will be. Just as we didn’t know in 1999 how the internet would evolve or who its winners would be. As it turned out, it was not the companies which built the internet that benefited most but those who piggybacked on the expensive new infrastructure. Maybe it will be a similar story this time with Nvidia’s chips.
In one important way, today’s stock market boom is unlike the dot.com period. Such has been the sales and earnings growth of the market leaders this time around that valuations never reached excessive levels. According to Goldman Sachs, the seven biggest companies today are half as expensive, as a multiple of profits, as the seven biggest were in 2000. They are cheaper, too, than the largest companies were at the height of the Japanese property and stock market bubble in 1989. They are also less expensive than the Nifty 50 stocks that led the market rally in the early 1970s.
But there are enough straws in the wind to be concerned. The first is the disconnect between the market leaders - the Fab Five - and the rest of the market. Since March, five tech giants have seen their share prices rise by 11 per cent on average while the other 495 shares in the S&P 500 have fallen by 2 per cent. Just as interesting is who the relative winners and losers have been. The most defensive stocks (utilities and consumer staples) have held up much better than the most cyclical companies (industrials, materials, energy). That tells me that investors are worried about the outlook. They are looking for safe havens.
Three other things concern me about Nvidia’s recent surge. First, it seems illogical that it and the companies to which it is selling its powerful (and expensive) chips should both be riding high. The flip side of Nvidia’s revenue windfall is surely a rise in its customers’ costs. It must be good for one or the other. But both at the same time?
Second, it is telling that founder Jensen Huang and other directors at Nvidia are selling meaningful amounts of Nvidia stock after the recent surge in price. Share sales are less significant than share purchases because there are plenty of good reasons to raise funds but only one reason to buy a stock. More than one director reducing their holding at the same time is rarely a good sign, however.
Finally, I notice that hedge funds started to unwind their heavily over-crowded long positions in Nvidia about two weeks ago. These fickle investors are often the canary in the coal-mine at turning points.
My biggest concern about Nvidia is that many people are more heavily exposed to the company’s shares than they realise. Even if a fall in the value of this one stock does not trigger a wider negative shift in sentiment (I think it would), then the outsize presence of Nvidia in many investment portfolios is a reason to be worried.
Many novice investors start their investing journey with a global index-tracking fund. For good reason. It appears to offer an attractive combination of low cost and broad diversification. Even Warren Buffett famously said ten years ago that, after his demise, his wife should invest 90 per cent of her money in a low-cost S&P 500 tracker. I’m not sure he would say the same today.
That’s because a US or Global tracker fund is a massive bet on the tech sector. Far from being a low-risk investment, it has become a gamble on a continuation of the investment status quo. A look at the top holdings of one representative tracker, the L&G Global Equity Index Fund, bears this out. More than a fifth of the fund is held in just ten stocks, eight of which are technology companies, and nine of which are American. One dollar in eight of an investment in this fund is in Microsoft, Apple and Nvidia.
And this concentration is not just a US phenomenon. If you were to buy an emerging market tracker fund, you might be surprised to know that 8 per cent of your money is invested in just one company, Taiwan Semiconductor Manufacturing Company. Want to track the European stock markets? Almost a tenth of your cash is in just two companies, Novo Nordisk and ASML.
I don’t know how the Nvidia story unfolds from here. But I do take from this week’s setback three important nuggets of investment wisdom. Know what you are investing in. Beware when share prices head straight up the page. And remember that it is rarely different this time.
Tom Stevenson is an investment director at Fidelity International. The views are his own.
