Is NVIDIA a crowded trade?

Five charts to start your day

The remarkable rise of NVIDIA in 2024 has captivated investors and sparked debates about whether the market is entering bubble territory. The company, which has become synonymous with the AI revolution, saw its stock price soar as demand for AI-related technologies exploded. It almost seemed as though if NVIDIA fell off a cliff, it would probably just fly, given the way it was being priced.

Investors, both institutional and retail, rushed to gain exposure to NVIDIA, driving up the market cap of ETFs focusing on the company to unprecedented levels.

However, this surge in popularity has raised concerns among seasoned market watchers. Historically, when a single stock dominates investor sentiment to such an extent, it often precedes a market correction. The rapid growth in NVIDIA's stock price and the increasing concentration of investor portfolios in NVIDIA-related ETFs suggest a crowded trade – one where everyone is betting on the same outcome.

The parallels to previous market cycles are hard to ignore. Just as the tech boom of the late 1990s was followed by a painful correction, there is growing unease that the current AI-driven rally could suffer a similar fate. While NVIDIA's fundamentals remain strong, the sheer scale of its stock price appreciation in such a short time has led some to question whether the market is writing checks the economy can't cash.

Take a look at this chart from Longview Economics. I thought it was excellent, even though I am not a fan of dual-axis charts. NVIDIA ETFs are up 18 times in just under a year, while the share price has risen 2.6 times. This trade certainly feels very crowded.

Source: Longview Economics

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