The Nvidia (NASDAQ: NVDA) share price closed 4% higher Monday (22 September), on the back of the chip maker’s new deal with ChatGPT pioneer OpenAI.
The two said they’ve signed a letter of intent, with Nvidia planning to invest up to $100bn in OpenAI. The aim is to provide at least 10 gigawatts of power to advance the next generation of AI models. Nvidia CEO Jensen Huang called it the “biggest AI infrastructure project in history.”
A 4% rise on the day might not sound like much for a stock that’s already up 1,350% over the past five years. But it’s enough to nudge the market cap close to a staggering $4.5trn.
AI stock boost
This deal will inevitably brighten the enthusiasm of long-term Nvidia bulls. But it could also add impetus for AI-led growth for a number of other stocks.
One of those is Micron Technology (NASDAQ: MU), due to post full-year results later Tuesday (23 September). Micron makes a range of semiconductor memory devices, including high-bandwidth memory. That’s in great demand for AI processing, and it’s helped send Micron earnings soaring over the course of the past year.
Valuation is my main concern with a stock like this, driven by a technology-led bull run. And in this case we’re looking at a scary trailing price-to-earnings (P/E) ratio of 137 for 2024.
Still, analysts expect that to fall dramatically for the 2025 year just ended, with most suggesting the high 20s. If forecasts are right, it could even fall under 15 in the next couple of years.
We must consider the intense competition in this sector, with a large number of global companies pumping out huge volumes of memory chips. What if someone else comes out with the next-generation technology to capture the AI imagination?
Even more chips
There’s a bigger AI valuation premium at Advanced Micro Devices (NASDAQ:AMD), with a lofty forward P/E up at 67. That’s a fair bit ahead of even Nvidia’s predicted multiple, which stands at 42. Hmm, AMD suddenly makes Nvidia look cheap.
AMD has recently signed a deal with IBM to work on developing quantum computing, and that gave the stock price a boost. I’m not holding my breath waiting for the quantum revolution, mind. It’s been promised for so long now, but really hasn’t lived up to the hype yet.
Yes, it might well herald the next computing revolution. I just wonder if investors might be paying a bit too much today for jam tomorrow.
Still, I can’t deny that AMD could hold significant potential for AI-led growth. And unlike so many of the start-ups, AMD joins Nvidia as a highly-profitable company with strong cash flow. And forecasts do show that P/E coming down fairly quickly.
What to do?
US consulting firm Bain & Company estimates AI companies will need around $2trn in combined revenue to fund their planned expansion to meet predicted demand. But they project a shortfall of $800bn. And that worries me.
I do think investors could do well to consider buying all three of these stocks for the long term. But the possibility of big short-term falls keeps me away, at least for now — I remember the dotcom bubble all too clearly.
