Fundstrat
Fundstrat's Tom Lee: Is There an AI Bubble?
10/24/2025, 8:00:28 PM
Economic Summary
- Worries about an AI bubble are likely overstated; speaker compares NVDA's role to Cisco in 1998 and argues NVDA is scarcer and more essential, implying less bubble risk (mentions NVDA, CSCO).
- AI spending is accelerating with enterprises starting to see payoffs—driving revenue, margin expansion, and efficiency gains that justify higher valuations for productive companies.
- Valuation multiples are dynamic and historical comparisons can be misleading; changes in nominal rates, recurring revenue mix, and a battle-tested market support structurally higher P/Es.
- Earnings fundamentals remain strong: roughly 85% of companies beat estimates this quarter, implying about 15% aggregate earnings growth—above typical late-cycle single-digit growth.
- Macro and policy (Fed actions, interest rates) and market sentiment now often dominate stock performance, so liquidity/monetary conditions create a 'monetary premium' embedded in equity multiples.
Bullish
- NVIDIA is a scarce, essential AI chip supplier benefiting from accelerating AI spend.
- AI spending is accelerating and enterprises are beginning to see payoffs in productivity and margins.
- High earnings beat rates and persistent earnings growth (~15% cited) support current valuations.
- Recurring revenue mix in the market supports higher average P/E multiples and potential re-rating.
Bearish
- Concerns that AI spending is a speculative bubble could trigger a sharp valuation reset.
- High valuation of some consumer/retail franchises (e.g., COST) makes them vulnerable if growth slows.
- Historical precedents like Cisco show commodity products can suffer extreme multiple contractions.
- Market sentiment and momentum dominating fundamentals could reverse quickly and hurt stock prices.
Bullish tickers
NVDACOSTWMTF
Bearish tickers
CSCOCOSTNVDAWMT
NVDA
Bullish
Singular scarce AI chip maker essential for premier models; benefits from accelerating AI spend and strong earnings execution.
Bearish
Concerns about an AI spending bubble could lead to valuation compression if demand disappoints or competition rises.
COST
Bullish
Membership model and recurring revenue support a premium multiple and durable earnings.
Bearish
Trades at high multiples relative to traditional firms, exposing it to multiple compression if growth slows.
WMT
Bullish
Large, steady retailer with stable earnings and a different, lower-valuation profile than membership-based peers.
Bearish
Lower multiple and margin sensitivity leave it vulnerable to consumer weakness or margin pressure.
CSCO
Bullish
Once-dominant hardware provider used in the discussion to contrast commodity hardware vs. scarce AI assets.
Bearish
Historic example of a market darling that became a commodity product, suffering extreme multiple contraction.
F
Bullish
Serves as a low-multiple baseline for valuation comparisons in the conversation.
Bearish
Represents cyclical, lower-multiple automotive earnings that can underperform in risk-off scenarios.
People mentioned
TomJensenPeter Lynch