Bet on suppliers in the AI ​​gold rush, says HAMISH MCRAE

A bubble is brewing in AI stocks. That’s the easy part to predict. The hard part is saying when it might explode.

The extraordinary increase in Nvidia’s share price, which makes it the most valuable company in the world for a few hours, is both a symbol and a warning.

It is a symbol of the real and positive impact that artificial intelligence will have on the global economy over the next decade and beyond.

It’s also a warning of how difficult it is for investors to determine which companies will be the winners of a major technological revolution and to put a price on the entire effort.

There are plenty of reasons to be confident that Nvidia is well positioned to benefit, and more on that in a moment. But a valuation of more than 3 billion dollars and we are talking about 4 billion dollars?

That’s more than the value of all the companies in the FTSE 100 index. There’s a lot of hope there.

There is also a warning in what has happened to the share prices of electric car start-ups. Tesla has become (and remains) the world’s most valuable vehicle maker, worth $570 billion, but that’s less than half of its November 2021 peak.

A number of other electric vehicle manufacturers have gone bankrupt. Fisker filed for bankruptcy last week. Proterra, an electric bus maker, went bankrupt last year. Its assets have been purchased by Volvo.

Shares in Lucid, now majority owned by Saudi Arabia’s sovereign wealth fund, have lost more than 90 percent of their value.

The same goes for investors in Rivian, which makes light trucks, who saw its shares touch almost $180 in that crazy November 2021, and are now at around $10.

While the global shift toward electric vehicles will continue, albeit perhaps a little more slowly than enthusiasts expected, for those investors who got caught up in the hype two and a half years ago it has been, at best, a disappointment and, at worst, a catastrophe.

Now look at the AI. Start with the positive case for Nvidia. It is not an AI company as such; rather it makes the equipment that is essential for the technology to be a success.

Generative AI uses almost incredible amounts of computing power, and Nvidia makes the platforms that make it possible for data centers to cope with these demands.

There is a parallel in history, by strange coincidence also in California, where Nvidia is based. It was the gold rush of 1848 to 1855, which attracted 300,000 people hunting to try to find the precious metal.

In fact, a small proportion made a fortune, but the vast majority were left with very little. But, most importantly, most of the lasting fortunes were made by companies that supplied prospectors with the equipment they needed: the shovels, the pots, the food and lodging, etc.

There is such a company, founded in 1853 in San Francisco by a German immigrant, who specialized in durable work clothing and which is still owned by his descendants. His name was Lévi Strauss.

Consider Nvidia as the gold rush mining kit provider, and at the moment it appears to be the best in its class to do so.

Furthermore, even if the vast majority of AI projects fall by the wayside, and there is some evidence that this is already happening, companies that can successfully implement it will do very well.

Markets may be right to believe that these companies will include Microsoft and Apple, the other two members of the $3 trillion club.

AND NVIDIA? It was founded in 1993 and is a very solid business. Yes, it will continue to be hugely successful and yes, it is in exactly the right corner of the AI ​​forest.

It is quite possible that, like Levi Strauss, it will exist in another 100 years or more. It’s the assessment that makes me nervous.

There is a pattern to all investment bubbles, as we saw in electric cars in 2021, although this one doesn’t seem as extreme. So it can run for a while and instead of bursting, it slowly deflates.

But for investors, the coming months look worrying.