Nvidia’s stock rise is a warning for Tesla — and vice versa

Well, that was a surprise.

Nvidia stock rose 24% to just under $380 a share, and added about $184 billion in market value, ending the day at roughly $940 billion. It was the third-largest single-day gain in market value by a U.S. company in history, according to Dow Jones market data. Number one? Amazon.com (AMZN) had $191 billion on February 4, 2022.

For Tesla ( TSLA ), there’s a danger lurking within Nvidia’s stock price reaction—as well as an opportunity.

Whether the profits make sense or not, AI is the next big thing. New Street Research analyst Pierre Ferragu wrote Thursday that Nvidia sales are expected to reach $100 billion in 2027 and $43 billion in 2023. He rates the stock a buy and has a $430 price target on the stock.

It wasn’t that long ago that Tesla’s electric vehicles were the next big thing—stock gains of more than 740% in 2020, the company’s continued profitability, and accelerating unit sales growth prove it.

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Tesla shares rose 0.9% on Thursday, but shares have fallen 22% over the past 12 months and are down about 40% from their August 52-week high. Increased EV competition, rising interest rates and falling car prices leading to weaker profit margins are weighing on investor sentiment.

However, retail investors like Tesla stock. More than 50% of shares are held by small investors. Nvidia shares are popular among retail investors, but investors bought Tesla shares and sold Nvidia in the past week, according to JPMorgan data. The risk is that a new, shiny toy leads to a selloff in Tesla stock and a spin on Nvidia.

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Falling in favor of a large group of investors, however difficult, can squeeze valuation multiples. Tesla stock trades at about 38 times 2024 earnings estimates

S&P 500

Traded around 18 times. Nvidia stock trades at 40x.

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There is good news for Tesla investors. It has its own AI business, but instead of generating natural language text, Tesla’s AI teams teach cars to drive themselves. “Tesla has tremendous potential in real-world AI,” CEO Elon Musk told CNBC’s David Faber after the company’s May annual meeting of shareholders. “Tesla will have a ChatGPT moment…suddenly three million cars will be able to drive themselves.”

That self-driving prospect, which Tesla calls full self-driving, isn’t reflected in stocks, says Wedbush analyst Don Ives. “The Street doesn’t rate Tesla’s AI part, and ultimately they’re a clear leader in FSD and Optimus,” he writes. “Over time this could add $40 per share to the Tesla story.” He rates Tesla stock a buy and has a $215 price target on the stock.

“FST is a free call option,” says Future Fund Active ETF (FFND) co-founder Gary Black, referring to an investor term that is not included in most valuations but can only benefit the stock if things break down favorably. “I don’t build [self-driving] I rate Robotaxis at my $320 price target, but if Tesla’s FSD suddenly drops to zero [driver] Interventions for a journey can create an Nvidia moment.”

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Not everyone believes Tesla’s FSD software will solve the self-driving problem anytime soon. “I like to look at it,” says Francisco Bido, senior portfolio manager at F/m Acceleration, which uses quantitative and fundamental factors for investing. He has a long position in Nvidia stock and a short position in Tesla stock.

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More competition for Tesla worries him. Nvidia is in a better position, he says, “They have a first-mover advantage [in AI].”

Without FSD, investors would value Tesla based on its car business, which was not enough to push Tesla shares above their record high of $414 in November 2021 when its market cap was north of $1 trillion. Today it is about 570 billion dollars.

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Sometimes hyperbole leads stocks to get ahead of themselves. That’s a risk for Nvidia stock, too.

Corrections & Amplifications: Nvidia gained $184 billion in market value on Thursday, the third-biggest one-day gain of any U.S. company and the biggest gain for Nvidia. An earlier version of the chart that appeared on Barron’s homepage with this article incorrectly stated that it was the largest one-day gain in a company’s market capitalization.

Write to Al Root at [email protected]

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