Artificial intelligence (AI) has been a hot investing theme for over a year now, since ChatGPT first arrived on the scene in November 2022. Since then, many companies in and outside of tech have been working on developing their AI capabilities to take advantage of next-gen technologies. And valuations have also risen with any stocks able to cash in from that.
Nvidia (NVDA 6.18%) is an easy example of that, with its market cap hitting more than $2 trillion this year. The company has been achieving strong top and bottom-line growth thanks to the growing popularity of AI. However, at more than 70 times earnings, some investors may be worried that Nvidia and other AI stocks are in what could just be today's version of the dot-com bubble.
One of the smartest businesspeople in the world, JPMorgan CEO Jamie Dimon, however, believes that AI is the real deal, and that it isn't just hype.
Why this isn't the dot-com bubble all over again
What makes artificial intelligence exciting is that virtually any industry can benefit from it. Whether it's automating processes or doing analysis more efficiently and effectively, there's plenty of potential for just about any business to use AI to its advantage.
In a recent interview with CNBC, Dimon said he believes that AI has the potential to "be used in almost every job." And his visions for AI go beyond just helping companies make better forecasts or tracking inventory levels. He said, "It may invent cancer cures because it can do things that the human mind simply cannot do."
Unlike the dot-com bubble where there was a lot of hype and not much substance, AI is already proving to be a game changer for many businesses. And while adoption levels will vary, Dimon believes this time around the excitement isn't getting ahead of the results.
In many cases, there's a good reason behind rising valuations
Nvidia and many other tech businesses are benefiting from AI as they are seeing demand for their products and services soar. Whether it's a greater need for data centers or companies seeking AI chips, Nvidia's business has been red hot. With risky dot-com businesses, they weren't profitable or making much money and yet their shares were soaring in value.
In Nvidia's case, the business has been doing exceptionally well. Not only is revenue climbing, but profits have also been skyrocketing. In the company's most recent fiscal year, which ended on Jan. 28, Nvidia reported revenue of $60.9 billion, which grew by 126% year over year. Net income of $29.8 billion was nearly seven times the $4.4 billion that Nvidia reported in profit in the previous fiscal year.
It makes sense for Nvidia's stock to soar, given such impressive figures. This isn't a risky dot-com business; it's an industry leader in the tech world that stands to benefit from AI's continued growth. The biggest issue is just how much growth is too optimistic when it comes to the company's expected future earnings. But there's little doubt that the future looks bright for Nvidia.
Another example is tech giant Microsoft (MSFT 1.82%), which invested $13 billion into ChatGPT-maker OpenAI. Microsoft predicts that AI may add up to $10 billion in annual revenue to its business in the long run.
In Microsoft's most recent quarter, revenue of $62 billion for the period ending Jan. 30 was up 18% year over year, with CEO Satya Nadella stating that "we've moved from talking about AI to applying AI at scale." A year earlier, the company's growth rate was a lackluster 2%.
Microsoft's valuation has hit $3 trillion, and the stock trades at more than 36 times earnings. Although that's cheaper than Nvidia, it's still a bit of a hefty price tag, given its much more modest growth rate.
AI stocks can still be good buys
Nvidia and Microsoft both have high valuations which may spook some investors today, but with AI having a transformative effect on many businesses and industries, it's not hard to see a path for these types of companies to continue getting bigger and more valuable in the future. As long as you're willing to buy and hold on to AI stocks for the long haul, they could still prove to be good investments as there's still plenty of growth ahead.
