Nvidia CEO Selling Stock: Sign the AI Bubble Will Burst?

Prior to now month, the CEO of Nvidia — the third-largest company within the S&P 500 and darling of the AI stock boom — has been liquidating lots of of thousands and thousands of dollars price of his shares.

It’s such a large, high-profile selloff that retail investors could also be wondering in the event that they should cut back their positions to safeguard against a possible pullback not only for Nvidia but all tech stocks benefiting from AI hype.

From June 13 to July 10, Jensen Huang, the president and chief executive of Nvidia, sold greater than 2 million NVDA shares in increments of 120,000, based on financial visualization platform Finviz, which tracks the trades of company executives and directors via SEC Form 4 filings.

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Through Form 4, the general public is made aware of insiders’ various transactions in company securities, including the amounts bought or sold, and the worth per share on the time of the transaction.

The worth of the shares offloaded by Huang is estimated to be around $250 million, and the window during which it was executed coincides with analysts’ claims AI stocks’ valuations being overinflated. As he and other high-ranking members of the corporate money of their shares — raising the specter of a possible AI bubble bursting — here’s some context average investors should consider as a way to protect their portfolios and shape their strategies within the near and medium terms.

AI stocks have been surging

For the past few years, AI has begun infiltrating quite a few features of on a regular basis life, from content creation and autonomous cars to software development and investing.

Subsequently, firms operating in those spaces — and AI-adjacent industries like semiconductors — have seen their valuations skyrocket. Under no circumstances is the next list of firms operating within the AI space exhaustive, however it provides a sampling of microchip manufacturers, cloud-computing businesses and others that’ve seen share prices rise exponentially within the recent past.

Over the past two years:

Oracle is up 110%.
Taiwan Semiconductor Manufacturing Company is up 116%.
Advanced Micro Devices is up 123%.
And Arista Networks is up 297%.

Nonetheless, it’s Nvidia’s performance that has turned heads over the identical period because the stock gained 710% since July 15, 2022. Earlier this 12 months, the corporate briefly surpassed Apple because the second-largest publicly traded company and currently boasts a market cap of $3.21 trillion.

Overvaluation of the tech sector

Huang is not the only executive reaping the rewards of his company’s surging stock price. It’s a reasonably common practice for executives to sell their preferred stock and lock in enormous gains. For instance, former Amazon CEO and current executive chairman Jeff Bezos has been on a selling spree: In July alone, he cashed in greater than 8.2 million shares of AMZN at an estimated value of $1.355 billion.

Investors shouldn’t assume that Huang and Bezos’s selloffs signify their company’s stock prices are about to crash. Nonetheless, analysts are concerned concerning the tech sector’s overinflated valuations and the way that has resulted in elevated market concentration.

Nvidia accounts for six.74% of the S&P 500 by weighting, with Amazon fourth on the list at 3.78%. Right away the highest six firms within the benchmark index — with Microsoft, Apple, Meta Platforms and Alphabet joining Nvidia and Amazon — account for nearly 30% of the entire S&P 500.

In other words, the portfolios of many investors could also be insufficiently diversified, and so they’re at heightened risk of suffering losses if these big tech stocks suddenly crash.

Analysts’ AI stocks outlook

Last month, Morningstar published its market outlook for 2024’s third quarter with a stark warning for long-term investors. After noting that “[a]nything related to artificial intelligence continued to surge within the second quarter,” the report stated: “While a rising tide can lift overvalued AI stocks even further into overvalued territory within the short term, in the longer term we predict long-term investors shall be higher off paring down positions in growth and core stocks, which have gotten overextended and reinvesting those proceeds into value stocks, which trade at a horny margin of safety.”

While a possible AI bubble won’t mirror March 2000’s dot-com crash, it is best for investors to never be overexposed to at least one particular industry, sector or asset class.

“These [bubbles] historically end badly,” James Ferguson, founding partner of the U.K.-based firm MacroStrategy Partnership, said on an episode of the podcast Merryn Talks Money with Bloomberg reporter Merryn Somerset. “So anyone who’s kind of a bit long within the tooth and has seen this kind of thing before is tempted to imagine it’ll end badly.”

While AI as an industry is nascent and still presents tremendous long-term opportunities, overvaluation could lead on to significant losses that result from near- and medium-term volatility as those firms’ valuations come all the way down to Earth. One defensive measure investors should take is embracing diversification amongst their portfolio holdings.

“Considering that AI stocks are generally at best fairly valued and at worst overvalued, we see significantly better opportunities elsewhere out there,” the Morningstar report added. “[S]pecifically in the worth category, which stays probably the most undervalued based on our valuations.”

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