Tim Hoyle, Chief Investment Officer
Thoyle@haverfordquality.com

AI, Speculation, and Market Fundamentals

As of mid-November, market exuberance has tempered. The cryptocurrency Bitcoin, which in many ways defines market speculation, is down close to 30% from its highs. As is AI hyperscaler Oracle and Facebook's parent Meta. There is a difference in how investors approach large declines across differing assets. When commodities such as Bitcoin fall – and rise – our only point of reference is their price.  There are no underlying assets, cash flow, or earnings growth. That is the definition of a speculative asset. While there may be room for speculation in some portfolios, at Haverford we choose to focus on investments in companies with strong cash flows, the potential for consistent earnings generation, and solid business plans.  

When the stocks of corporate blue chips fall, we know the underlying fundamentals will eventually be realized, and stocks, in the long run, gravitate towards their intrinsic value. Even if a stock price outruns corporate fundamentals in the near-term, as long as investors don't wildly overpay, fundamental growth leading to increased intrinsic value should eventually bail-out ill-timed stock purchases.  

This week, investors will get financial results from the world's most valuable company. Nvidia's tremendous lifetime growth has not abated as the stock matured into a well-respected blue chip. NVIDIA, which posted 2023 earnings per share (EPS) of $1.30 is expected to report $4.56 in per-share profits this year, fueled by unprecedented demand to power AI data centers and cloud infrastructure. This is not speculative growth; it reflects real-world deployment of AI across enterprise and consumer applications.  

Despite its meteoric rise and a market cap exceeding $4.5 trillion, NVIDIA is cheaper on a forward earnings basis than it was two years ago, thanks to earnings growth outpacing price appreciation. Its forward P/E ratio, while elevated, reflects robust profitability and a dominant position in AI infrastructure. 

While critics of this tech-driven market draw parallels to the dot-com bubble of the late 1990s, the comparison misses a critical point: most of today's leaders are profitable, cash-rich, and investing from a position of strength. During the dot-com era, many companies were unprofitable and trading at astronomical multiples on the promise of future growth. Today, the S&P 500 Information Technology Index trades near 30× forward earnings, well below the ~55× multiple seen at the peak of the dot-com bubble. 

A recent Blackrock Insights¹ article argues that while AI-related stocks have surged, the current environment differs from the dot-com bubble because earnings growth and real-world adoption of AI are accelerating. It highlights that valuations are elevated but supported by strong fundamentals, unlike the speculative nature of the tech bubble in the early 2000s. We concur with Blackrock's conclusion: investors should remain selective, focusing on companies with sustainable AI-driven revenue rather than chasing hype.

Prudence dictates that market prices are extended.  However, there is a lack of evidence to show that prices are wildly unaligned with fundamentals. The market's October highs could be a near-term top, and after years of incredible gains investors should expect, and be prepared for, the inevitability of a rough patch to come.  

At Haverford, we espouse disciplined investing with an eye to strong fundamentals and sustainable growth. We believe investors who bought stocks at recent highs (in some cases much higher highs) may need to exhibit some patience but may see their investments turn profitable as corporate intrinsic values grow. 

[1] Are we in a bubble? The AI boom in context | BlackRock