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Nvidia Soars in Top ETFs, But Bubble Fears Loom: Is the Chip Giant Overvalued?

Last Updated March 5, 2024 10:31 AM
Giuseppe Ciccomascolo
Last Updated March 5, 2024 10:31 AM

Key Takeaways

  • Nvidia’s value doubled in just 180 days, achieving a $2 trillion market cap faster than Apple and Microsoft.
  • Its significant weight in certain ETFs has significantly boosted their performance.
  • Is there more room to grow or is Nvidia a financial bubble?

Growing enthusiasm for artificial intelligence (AI) technology has turned Nvidia’s chips into a must-have product, in turn making the company itself the hottest stock on the market. The value of its shares has grown more than sevenfold since October 2022, positioning Nvidia as the third largest U.S. company by market value, with a capitalization exceeding $2 trillion.

Following outstanding fourth-quarter results reported on February 21, the chipmaker added nearly $280 billion in value in just two trading days. In 180 trading days, Nvidia managed to double its value from $1 trillion to $2 trillion, significantly faster than the more than 500 days it took Apple and Microsoft to reach a similar milestone.

Nvidia “Joins” Top European ETFs

The fervor surrounding Nvidia has sparked a notable surge in various ETFs. In particular, this is evident in those emphasizing semiconductors and artificial intelligence, among others. Nvidia’s diversified business lines justify its inclusion in a range of thematic ETFs, in addition to its presence in traditional market cap indices like the S&P 500 and Nasdaq, where its influence has notably increased in recent months.

In the realm of semiconductor-linked ETFs, Nvidia’s prominence is unmistakable. Notably, within the Amundi MSCI Semiconductors ESG Screened UCITS ETF , Nvidia alone constitutes a hefty 34% of an index comprised of 79 stocks. It significantly contributed to the ETF’s 25% surge in the initial two months of the year.

Similar patterns are observed in other European ETFs, such as the VanEck Semiconductor UCITS ETF  – up by 15% year-to-date – and the iShares MSCI Global Semiconductors UCITS ETF , that grew by 12% since January 1, 2024. Here, Nvidia commands substantial weights of 11% and 9.3%, respectively.

A notable contrast emerges in the concentration levels across these ETFs. The Amundi ETF permits a single stock to represent up to 35% of the index, whereas VanEck and iShares enforce stricter limits, capping individual stock weights at 10% to reduce concentration risk.

Nvidia’s substantial weight has driven the Amundi MSCI Semiconductors ESG Screened UCITS ETF, but also exposes it to the performance of a single stock.

Eyes On AI ETFs

Furthermore, attention is drawn to the world’s largest artificial intelligence ETF, with performances significantly surpassing the 7.5% rise year-to-date of the S&P 500.

Despite Nvidia’s influential position, certain themes such as sustainable mobility present mixed results. For instance, the Lyxor MSCI Future Mobility ESG Filtered (DR) Ucits ETF  records a 1.1% dip year-to-date. This happened despite Nvidia’s substantial weight of almost 14%. This is attributed to the lacklustre performance of other index components, notably Tesla, amid a sluggish start for the electric mobility segment.

Conversely, the Xtrackers Future Mobility UCITS ETF 1C  fares better with a rise of 7.7% from the beginning of 2024. This positioned Nvidia at the forefront with a weight of 6.6%, aligning with the index’s strategy of limiting individual securities to not exceed 4.5% of the entire index, reviewed semi-annually.

Can It Grow Further?

However, some investors raise doubts about Nvidia’s ability to sustain its rapid pace of growth. Analysts polled by FactSet  expect revenue of $107 billion for the fiscal year ending in January, up from $60.9 billion last year.

Additionally, concerns are emerging about the sustainability of demand for chips from big tech companies in the coming years. Nvidia revealed that a single buyer contributed to nearly a fifth of last year’s sales. Others also fear the emergence of new competitors in the chip industry, which could impact sales or margins.

Fred Hickey, editor of the High-Tech Strategist said : “I think a lot of people are overlooking the fact that this is an up-and-down company.”

Hickey added that he had bet against Nvidia through long-term put options, purchased after the last month’s earnings report.

Nvidia shares have fallen by 50% or more on 14 separate occasions since going public in 1999, according to Dow Jones Market data . Notably, the stock fell 56% over a two-month period in 2018, and again over an eight-month period ending in 2022.

Sound View said : “Sooner or later, there will be a cap on earnings. They’re not going to double every year, it just doesn’t work that way.”

Is Nvidia A Financial Bubble?

However, both stock bulls and bears agree on one thing: Nvidia‘s rise is generating exceptional profits. This differentiates the enthusiasm for AI from the speculative mania of the recent past. The same happened in the case of cannabis or blockchain stocks.

In the latest quarter of 2023, Nvidia reported a profit of $12.29 billion. This was up from $680 million reported in the previous three months ending in October 2022. Gross profit margins rose to nearly 76%, compared to 53.6% in the same period.

As a result, by some measures, the stock has actually become cheaper. Nvidia trades  at 32 times expected earnings over the next 12 months, according to FactSet. The two-year average is 38 times while the S&P 500 multiple is 20.6 times. Joseph Zappia, director and co-Chief Investment Officer at Lvw Advisors said :

“We cannot call this a speculative mania because its price-to-earnings (P/E) ratio is lower than a year ago. Nvidia is putting into practice what it promised. All of this is happening within a bull market. Investors in general remain positive as prices continue to rise.”


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