Despite concerns of a potential ‘bubble’ in artificial intelligence stocks, Nvidia’s future remains promising, according to fund manager Stephen Yiu, who believes the chip titan will retain its industry leadership for years.

This week, Nvidia temporarily allayed market fears surrounding the AI surge by surpassing expectations with third-quarter revenues hitting $53 billion, and it has raised its fourth-quarter guidance to $65 billion.

However, anxiety over an AI bubble resurfaced on Friday, triggering a tech-driven sell-off in global stock markets, compounded by US jobs data that dampened hopes for Federal Reserve interest rate cuts.

Yiu, who manages the £1.7 billion Blue Whale Growth fund, remarked to This is Money that Nvidia’s earnings report was “more of a non-event,” despite signs of excessive spending and inflated valuations within the tech sector.

Known for his cautious stance on Nvidia’s ‘magnificent seven’ peers, Yiu’s Blue Whale Growth fund has avoided investing in tech giants like Microsoft, Apple, and Google’s Alphabet, even though these companies have seen substantial share price increases and significant AI investments.

He commented, “A lot of cash is being burned and money wasted in AI investments. But that doesn’t mean that AI isn’t real.”

Nvidia shares have almost doubled in value since their post-‘liberation day’ plunge in April and are up more than 1,300 per cent over the last five years, thereby racking up a share price above $186 and an unprecedented market capitalisation of $4.5trillion.

Taking profits: Stephen Yiu’s Blue Whale Growth has now sold more shares of Nvidia than it has ever bought 

The group now represents more than 6 per cent of the MSCI World index. By comparison, the entire UK market represents just 3.6 per cent of the index of developed market stocks.

And, as a result, Yiu has now sold more Nvidia shares than he has ever bought as its value has rocketed and City regulations have forced the fund to keep its top holding to a 10 per cent limit.

Despite enormous gains, however, Yiu says Nvidia’s current valuation is not excessive – particularly when compared to other names in the sector.

‘If you look at the private market, like OpenAI – the valuation is an insane number, a finger in the air valuation.

‘Nvidia currently trades at 30x earnings, which is very much in line with Microsoft, Apple and MasterCard.

‘Apple has been trading at 30x for the last few years already – and Apple doesn’t grow its top line by more than 10 or 15 per cent annually, unlike Nvidia.

‘Nvidia is going to make about $200billion in revenue this year, and then next year is going to be more than $250billion.

‘At some point, the growth rate will steady down, but I think the market is not going to punish it too badly. You don’t need to grow 15 per cent every single year to keep a 30x rating.’

Blue Whale Growth’s top 10 holdings  

What can we learn from the dot-com bubble?

The tech giants are spending billions of dollars every year on AI, encouraged by an investor frenzy that has seen firms punished when capital expenditure forecasts have disappointed.

And companies of all kinds around the world have increasingly attempt to pique investor interest by boasting their own investment in the technology.

It means total AI spending will hit $1.5trillion this year, rising to $2trillion in 2026, according to analysis from US advisory firm Gartner.

Billions of dollars of investment and high valuations accrued by even unprofitable firms have been the key driver of bubble fears.

Should these fears be realised, Yiu says investors should look to the dot-com bubble of the late 1990s for guidance on things to come.

‘Many [dot-com] businesses are no longer with us. It’s going to be same for AI.

‘Alphabet or Google search, it was the seventh search engine created – where are the others now? Google search at the time had a better algorithm in terms of ranking pages and using user actions to make it more relevant than rivals who disappeared.

‘AI is similar, but it’s unclear who might be the winner. The competition is very intense in terms of spending money on AI to make a competitive product.

‘From an investor perspective, it’s probably a bit safer and stick with companies guaranteed to be on the receiving end of that spending – you don’t need to worry about who’s going to win, and you’re still receiving the cash as we speak.’

For Yiu, that means Nvidia and rival Broadcom, which works with the tech giants to make chips in-house.

‘There’s only two companies outside of China that can do this,’ he adds.

‘Within the Blue Whale Growth fund, we also have a Vertiv, which is a liquid cooling system for AI data centres.

‘We have also recently gone into [South Korea’s] Hynix, which does memory and storage, because we believe there’s going to be more machine generated data going forward than the entire human population has gone on record.’

Blue Whale Growth has delivered returns of 26.9, 97 and 85.4 per cent over one, three and five years respectively. Peers in the IA Global fund sector have managed returns of 9.2, 35.7 and 50.2 per cent over the same periods, respectively.

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