The Two High-Growth Sectors That Could Outperform Tech
Over recent years, there has been no bigger opportunity for investors than technology.
The FAANG stocks alone have gained over $1 trillion in market capitalization since 2014 – and these stocks, along with other tech movers and shakers, have helped propel indices to constant new highs.
While tech shows no signs of letting up on its dominance over markets, investors should know about two other multi-billion dollar sectors nipping at its heels. In today’s infographic, done in conjunction with SmallCapPower, we’ve highlighted the macro investment cases behind tech as well as these other high-growth areas: battery metals and cannabis.
For those interested, they’ve also published a watch list of nine stocks with double or triple-digit growth in these sectors.
The infographic highlights three of the top performing stocks in these sectors YTD. Don’t forget to see the full list of nine stocks.
Like technology, the battery metals and cannabis sectors have upside attached to secular trends that are changing our world.
Technology: “Software is eating the world”
Battery Metals: The green energy revolution
Cannabis: Legalization and decriminalization of cannabis products
As a result, all of these sectors are poised to continue expanding at rapid rates:
|Market size (2016)||$880B||$57.0B||$6.7B|
|Market size (2021e)||$1.03T||$82.9B||$20.4B|
It’s worth mentioning that above projections are based on the overall IT sector, the rechargeable batteries market, and the legal cannabis market.
Further, it’s also important to recognize that individual subsectors within tech are growing much faster than the overall market as a whole, such as the blockchain, IoT, cybersecurity, SaaS, AI, and VR/AR.
Sustainable Growth Drivers?
While there’s no shortage of hype around tech, battery metals, or cannabis, it is also clear that all of these markets will only grow in importance over time.
In technology, for example, the slower-moving verticals like healthcare, government, finance, and education are only starting to get disrupted. The blockchain is in its early days and will touch many aspects of life, and AI alone is expected to have a $15.7 trillion impact by 2030.
Meanwhile, the green revolution is driving the future importance of battery metals like lithium, cobalt, nickel, and graphite. As EV penetration grows, so does lithium-ion battery use – and these metals are all needed to make them work.
Finally, the trajectory of legalized cannabis seems difficult to stop. In multiple states, cannabis is already available for recreational use – and in recently-legalized places like Canada and California, the recreational shops will open up very soon. However, the cannabis industry is still in its infancy, and many millions of people are still expected to gain access yet. This, like the other two industries, creates a fast-growing opportunity for both business and investors.
Nvidia Joins the Trillion Dollar Club
America’s biggest chipmaker Nvidia has joined the trillion dollar club as advancements in AI move at lightning speed.
Nvidia Joins the Trillion Dollar Club
Chipmaker Nvidia is now worth nearly as much as Amazon.
America’s largest semiconductor company has vaulted past the $1 trillion market capitalization mark, a milestone reached by just a handful of companies including Apple, Amazon, and Microsoft. While many of these are household names, Nvidia has only recently gained widespread attention amid the AI boom.
The above graphic compares Nvidia to the seven companies that have reached the trillion dollar club.
Riding the AI Wave
Nvidia’s market cap has more than doubled in 2023 to over $1 trillion.
The company designs semiconductor chips that are made of silicon slices that contain specific patterns. Just like you flip an electrical switch by turning on a light at home, these chips have billions of switches that process complex information simultaneously.
Today, they are integral to many AI functions—from OpenAI’s ChatGPT to image generation. Here’s how Nvidia stands up against companies that have achieved the trillion dollar milestone:
|Joined Club||Market Cap|
|Peak Market Cap
Note: Market caps as of May 30th, 2023
After posting record sales, the company added $184 billion to its market value in one day. Only two other companies have exceeded this number: Amazon ($191 billion), and Apple ($191 billion).
As Nvidia’s market cap reaches new heights, many are wondering if its explosive growth will continue—or if the AI craze is merely temporary. There are cases to be made on both sides.
Bull Case Scenario
Big tech companies are racing to develop capabilities like OpenAI. These types of generative AI require vastly higher amounts of computing power, especially as they become more sophisticated.
Many tech giants, including Google and Microsoft use Nvidia chips to power their AI operations. Consider how Google plans to use generative AI in six products in the future. Each of these have over 2 billion users.
Nvidia has also launched new products days since its stratospheric rise, spanning from robotics to gaming. Leading the way is the A100, a powerful graphics processing unit (GPU) well-suited for machine learning. Additionally, it announced a new supercomputer platform that Google, Microsoft, and Meta are first in line for. Overall, 65,000 companies globally use the company’s chips for a wide range of functions.
Bear Case Scenario
While extreme investor optimism has launched Nvidia to record highs, how do some of its fundamental valuations stack up to other giants?
As the table below shows, its price to earnings (P/E) ratio is second-only to Amazon, at 214.4. This shows how much a shareholder pays compared to the earnings of a company. Here, the company’s share price is over 200 times its earnings on a per share basis.
|P/E Ratio||Net Profit Margin (Annual)|
Consider how this looks for revenue of Nvidia compared to other big tech names:
$NVDA $963 billion market cap, 38x Revenue
$MSFT $2.5 trillion market cap, 12x Revenue$TSLA $612 billion market cap, 7.8x Revenue$AAPL $2.75 trillion market cap, 7.3x Revenue$GOOG $1.6 trillion market cap, 6.1x Revenue$META $672 billion market cap, 6x Revenue pic.twitter.com/VgkKAfiydx
— Martin Pelletier (@MPelletierCIO) May 29, 2023
For some, Nvidia’s valuation seems unrealistic even in spite of the prospects of AI. While Nvidia has $11 billion in projected revenue for the next quarter, it would still mean significantly higher multiples than its big tech peers. This suggests the company is overvalued at current prices.
Nvidia’s Growth: Will it Last?
This is not the first time Nvidia’s market cap has rocketed up.
During the crypto rally of 2021, its share price skyrocketed over 100% as demand for its GPUs increased. These specialist chips help mine cryptocurrency, and a jump in demand led to a shortage of chips at the time.
As cryptocurrencies lost their lustre, Nvidia’s share price sank over 46% the following year.
By comparison, AI advancements could have more transformative power. Big tech is rushing to partner with Nvidia, potentially reshaping everything from search to advertising.
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