AI investor on why Nvidia's valuation isn't crazy and his top picks in the space

Published Tue, Mar 5 20246:55 AM EST

Jesse Pound @/in/jesse-pound @jesserpound

The seemingly unrelenting rally for Nvidia has started to make some market watchers nervous, but many investors are standing strongly behind the chipmaker, as evidenced by its 3.6% jump on Monday. Zehrid Osmani, a portfolio manager at Martin Currie, a Europe-based affiliate of Franklin Templeton, is one such investor. Osmani told CNBC that he sees "potential risk of froth" in the AI trade as a whole, but not for Nvidia. "Unlike the basket of AI [stocks] that has seen multiple expansion, Nvidia has actually seen multiple contraction. The share price has moved by less than the earnings upgrades," Osmani said. Nvidia's price-to-earnings ratio, using the projections for the next 12 months, is 32.4, according to FactSet. That is well above the S & P 500's P/E ratio, but below Nvidia's five-year average. That may be surprising to some, given the fact that Nvidia's stock is up more than 250% over the past year. NVDA 1Y mountain Shares of Nvidia have surged more than 250% over the past 12 months. Beyond the forward price-to-earnings metric, Osmani also highlighted the "PEG ratio" — price/earnings divided by earnings growth rate — and return on invested capital as valuation metrics that looked favorable for Nvidia. Nvidia's PEG ratio is currently only a relatively tame 1.1, according to FactSet Nvidia is one of the biggest holdings in two of Osmani's funds, including the FTF Martin Currie US Unconstrained Fund , which is domiciled in Great Britain. Osmani's funds are highly concentrated, and one of the three core themes that the funds focus on is artificial intelligence. Another top holding related to AI is Microsoft , which has the benefit of an equity stake in OpenAI and an existing customer base of large companies. "Ultimately, corporates are not going to be competed away by AI. They will be competed away by another corporate that will harness AI better and faster than they do. So there will be a critical element of needing to channel more spend toward AI for a corporate," Osmani said. Focusing on two large stocks does raise the possibility that the Martin Currie funds will miss out on the rise of a newer company, but Osmani said that making those types of bets doesn't fit into his team's investment philosophy. "We tend to focus on companies that have a high return on invested capital and attractive growth profiles. So yes, there will be companies that might also have attractive growth opportunities, but they might be early in their life cycle. They might be loss making. We tend to favor companies that are better established, ultimately," Osmani said.