Last Wednesday, Nvidia became the first listed company in the world to reach a market capitalisation of $5 trillion – that’s $5,000 billion. A day earlier, Microsoft and Apple were neck and neck in the race to hit $4 trillion, with Microsoft closing slightly higher and becoming the second company ever to cross that historic threshold. While Microsoft climbed steadily – from $3 to $4 trillion in 22 months – Nvidia shot ahead: in just over three months, it jumped from $4 to $5 trillion.
"},"alignedImage":{"position":"bottom"}},{"componentType":"sectionTitle","title":"Nvidia Is as ‘Big’ as Germany"},{"componentType":"paragraph","richBody":{"value":"These figures are almost beyond imagination: Nvidia is now worth as much as Germany’s gross domestic product (GDP) and nearly five times that of the Netherlands. The huge surge in valuations of companies like Nvidia, combined with mega-investments of tens of billions of dollars in artificial intelligence (AI), raises the question of whether we are now in an AI bubble.
But based solely on share prices or market value, or the amounts invested in AI, we cannot conclude that we are in a bubble—or, in other words, that investors are paying far too much for these shares.
"},"alignedImage":{"position":"bottom"}},{"componentType":"sectionTitle","title":"Big Tech Valuations Are Not Excessively High"},{"componentType":"paragraph","richBody":{"value":"What investors are willing to pay is expressed in valuations such as the price-to-earnings ratio (P/E). For Nvidia, investors currently pay about 33 times the expected earnings over the next 12 months. Apple (32), Amazon (31) and Microsoft (30) are slightly lower, while Alphabet (Google’s parent company) trades at around 25 times expected earnings. Meta (Facebook, Instagram) is at 21 times.
Comparisons are often made with the dotcom bubble, which peaked in March 2000. But compared with then, these valuations are modest. Back then, investors were willing to pay 60 times Microsoft’s expected earnings. Other high-flyers were even more extreme: Oracle traded at a P/E of 120 at the height of the dotcom hype, while Cisco hit 130.
"},"alignedImage":{"position":"bottom"}},{"componentType":"sectionTitle","title":"High profits, huge cash flows"},{"componentType":"paragraph","richBody":{"value":"Based on today’s valuations, it’s hard to call this a bubble. In the late 1990s, investors paid infinite multiples for companies that often didn’t even make a profit. Today, you could argue that we can buy shares relatively cheaply in dominant companies that have been highly profitable for years—and can fund their AI investments from abundant operating cash flows.
"}},{"componentType":"sectionTitle","title":"You Have to Spend to Gain"},{"componentType":"paragraph","richBody":{"value":"As for those investments, sceptics wonder whether companies will ever recoup them. They certainly weigh on profits, and it’s not clear for all firms whether they will ever pay off. Yet Microsoft, Alphabet, Amazon and Meta all announced last week, alongside their quarterly results, that they are ramping up AI spending. The risk of under-investing—and missing the boat—is simply too great.
Hundreds of billions of dollars are being poured into AI computing power and data centres. Companies providing the infrastructure, such as Nvidia with its powerful chips, are making a fortune. Amazon, Microsoft and Alphabet, whose data centres host cloud and AI applications, are also thriving. Microsoft says demand for its Azure cloud service still exceeds available capacity. Microsoft and Alphabet can also integrate their language models—Copilot and Gemini—into widely used products like Office 365 and Google Search. Meta, meanwhile, can use algorithm improvements to make ads more effective and charge higher prices.
"},"alignedImage":{"position":"bottom"}},{"componentType":"sectionTitle","title":"Making the Right Investment Choices"},{"componentType":"paragraph","richBody":{"value":"Despite strong earnings updates, not all shares were greeted with equal enthusiasm. It’s worth noting that prices had already surged in recent months following announcements of major AI deals.
Amazon’s results were rewarded with a 14% share price rise, while Meta fell 11%. Investors seem unsure whether Meta—spending as much as its peers—will recoup its investments through ad sales. While we certainly don’t write off Meta—the company posted much better-than-expected results and continues to grow rapidly—investors appear to be becoming more selective. The AI boom is far from over, but not every company will emerge a winner. Making the right investment choices is becoming increasingly important.
"},"alignedImage":{"position":"bottom"}},{"componentType":"linkList","iconTitle":{"title":"Read More"},"textLinks":[{"url":"/en/personal/investing/market-news-and-views/number-of-the-week-overview","text":"Number of the Week Overview"},{"url":"/en/personal/investing/market-news-and-views","text":"More News and Views"}]},{"componentType":"sectionTitle","title":"Good to know"},{"componentType":"paragraph","richBody":{"value":"Investing involves risks and costs. The value of your investment may fluctuate. Past performance is no guarantee of future results. Read more about the risks of investing.
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