• FAANGM was the biggest gainer in May, up 8.6% compared to the Nasdaq’s gain of 7.6%, and a 0.2% rise in the S&P 500.
• Big Tech rode the AI wave in May, with four of the FAANGM rising >10%. Large-cap semiconductors performed better, gaining 29-36%, with other small-mid cap AI-related software companies doubling their stock price in a month.
• With such hype surrounding AI, valuations for companies like Nvidia have run up tremendously (184x LTM P/E), drawing comparisons to the Dot-com bubble. Cisco LTM P/E peaked at 382x in the Dot-com bubble.
• FAANGM P/S has moved +1 std dev away from its long-term average with YoY revenue growth estimates remaining relatively unchanged. Near-term weakness in demand for tech consumer goods, digital advertising, and Cloud, still persist. As such, we remain NEUTRAL on FAANGM.

AI-Related stocks outperformed in May

Artificial Intelligence (AI) was the key buzzword in May, with many touting AI to be the next evolution in technology. Nvidia confirmed the surge in demand for AI-related hardware during their 1Q23 earnings results. Surprisingly, Big Tech were the laggards in terms of performance compared to other AI companies, gaining 4-20% in May. Amongst Big Tech, Netflix was the best performer (20%), with Apple the laggard (4%). Large-cap semiconductor stocks like Nvidia and Broadcom fared slightly better, gaining 29-36%, with small-mid cap AI-related software companies like C3.AI and Palantir taking the cake, almost doubling their stock price in May (Figure 1).

Nvidia seeing a significant spike in price and valuations

At the end of May, Nvidia was trading at 184x LTM P/E, >4x higher than the 43x it was trading at a year ago (Figure 2). This comes as investors piled into the AI hype train, with Nvidia deemed as one of the main beneficiaries of widespread AI adoption. The company is the main supplier of high-end GPUs which are needed to run AI programs.

As we see large-cap names like Nvidia reach astronomical valuations, it’s tough not to draw comparisons to Cisco Systems – which became the most valuable company in the world (US$500bn) during the peak of the dot-com bubble. Cisco’s LTM P/E hit 382x, about 8 times higher than what it was 2 years prior (46x), before crumbling to 24x LTM P/E 2 years after the dot-com bubble burst.

We are seeing some similarities with the euphoria which surrounded many tech companies like Cisco pre-2000. We use 2 possible scenarios to compare the current AI hype:

1) Assume NVDA valuations have reached a peak (Figure 2): when compared to the dot-com bubble would suggest that the hype we are seeing now is only half the euphoria during the dot-com bubble (184x vs 382x).

2) Assume the hype surrounding AI is in its infancy: NVDA’s price action could follow a similar trend as CSCO during the dot-com bubble with significantly more room to run (Figure 3).