Nvidia (NVDA 6.18%) stock has been on fire amid the massive demand for its AI chips. That has led to worries of overvaluation amid its 249% gain over the last 12 months.
That could also be worrisome, given the recent history of another AI stock, Tesla (TSLA -1.11%). Ark Invest's Cathie Wood predicted a $2,000 per share price for Tesla by 2027 on anticipated demand for its self-driving platform. That forecast has occurred as falling demand for EVs and lower gross margins hamper its stock, which is down 30% in 2024.
Although Nvidia is not invincible, it has not shown any signs of slowing so far. Hence, before assuming that Nvidia will follow Tesla's lead, investors should consider these points.
1. Differences between the two businesses
Investors should remember that it has only been in recent years that investors viewed Nvidia and Tesla as potential competitors. Tesla was long seen as an automaker and a battery company, and even now, car sales make up most of the company's revenue.
However, as mentioned before, some analysts paid more attention to Tesla's self-driving platform. In this regard, Tesla has made an unusual and intriguing decision. Rather than turning to Nvidia or Advanced Micro Devices for the chips to power the platform, Tesla developed AI chips, software, and robotics in-house.
Nvidia focuses more heavily on AI chips, primarily with data centers. Although automotive makes up a tiny fraction of its revenue, its product line includes three different chips tailored to driver assistance and full self-driving. Additionally, it offers software packages, including an operating system and neural network.
Nvidia credited Tesla with "raising the bar." One has to assume Tesla is the industry leader in this niche. Nonetheless, Nvidia argues that it offers the only platform on which the auto industry can build.
In truth, both companies have work to do in this area to achieve full self-driving. Still, with Nvidia's focus in the data center, it seems like it will perform regardless of whether it can develop a competitive advantage in the auto industry.
2. Effects on financials
Not surprisingly, differing focal points have naturally led to divergent financial results.
In fiscal 2024 (ended Jan. 31), Nvidia's revenue of $61 billion surged 126% higher over the previous year, leading to a net income of $31 billion, a 581% yearly rise. Given such results, the massive gains in Nvidia stock seem less surprising.
In contrast, Tesla's lower margins may have weighed on Tesla's growth rate, at least in the near term. In 2023, revenue grew at an annual rate of 19% to $97 billion. That sounds promising until you consider that it delivered 38% more cars, meaning that gross margins fell from 26% to 18% during that time. Such results may dim the optimism about generally accepted accounting principles (GAAP) net income, which rose 19% to $15 billion.
3. The mixed signals coming from valuations
Despite Nvidia's strong financial performance, investors may not know what to make of the differing valuation metrics between the two companies.
Due to Nvidia's rising stock price, the price-to-sales (P/S) ratio increased to about 37. This is a high level even for a company experiencing massive growth, but it likely reflects the excitement boosting the stock.
In contrast, Tesla currently sells at a P/S ratio of 6. This is not a record low for Tesla, as the sales multiple fell below 2 in 2019, right before the pandemic. Still, the P/S ratio is at its lowest level since 2020, and may lead some investors to question how much more downside there is for Tesla stock.
Nonetheless, despite Tesla's recent decline, the company trades at a forward P/E ratio of 54 as price cuts and slimmer gross margins begin to reduce profitability. Interestingly, Nvidia's rapid earnings growth translates into a forward P/E ratio of just 37. Such a multiple may imply that Nvidia may have an advantage despite recent gains.
Ultimately, investors should take both the P/S ratio and forward P/E ratio into account. However, since earnings tend to influence stock prices more directly, the metrics seem to place Nvidia in a more favorable light than Tesla.
Will Nvidia crash like Tesla?
Given current conditions, Nvidia stock will probably not decline to the same extent as Tesla anytime soon. Indeed, competition and an inevitable downturn in the chip industry could eventually undermine Nvidia. Still, with demand so strong for AI chips, such a scenario will likely not affect Nvidia in the foreseeable future.
Tesla faces a more uncertain path. For now, slimmer margins on auto sales will pressure the company. Also, it is unclear when (or if) Tesla's full self-driving platform will take over all driving functions and attract customers. So, while Tesla stock could eventually come back, investors should not expect such a recovery in the near term.
