Why Rivian Is a Better Bet Than Tesla Right Now
The Takeaway
- Rivian’s R2 SUV launch targets mass market with $45,000 price.
- Rivian trades at 4x next year’s sales, Tesla at 14x, signaling value.
- Rivian leads in owner satisfaction, 85% would buy again, topping Tesla.
As Elon Musk shifts Tesla away from its roots into robots and robotaxis, investors hunting for the next big electric vehicle play might want to consider Rivian, which is poised for a mainstream breakout just as Tesla was 10 years ago.
Rivian’s sales are tiny—it sold just over 42,000 cars last year to Tesla’s 1.6 million. But the company this year plans to launch a more affordable vehicle that could make it a more viable option for the mass market.
That could rescue Rivian’s stock, which after a blistering public debut in the booming market of 2021, when it reached a market capitalization of nearly $100 billion, has plunged to a market value of around $25 billion. At the current value, Rivian is trading at less than four times next year’s estimated sales, well below Tesla’s 14 times.
Right now Rivian sells two types of electric consumer cars: the R1-T pickup truck and the R1-S SUV, each of which retails for over $70,000. It also sells a commercial delivery truck, a generic version of a bespoke truck it designed for Amazon, one of Rivian’s biggest shareholders. This year it will launch the R2 SUV, which its CEO, RJ Scaringe, says will sell for a starting price of $45,000.
Rivian has already established itself in some important ways. It nabbed the top spot among car brands for owner satisfaction on Consumer Reports’ latest annual survey of vehicle owners, released in December. Eighty-five percent of survey respondents who own a Rivian vehicle said they’d buy it again. BMW, in second place, garnered a similar sentiment from just 71% of owners surveyed. Tesla, at 69%, ranked fourth.
In the view of investor Hamid Shojaee, Rivian today is in a position similar to Tesla’s before it started selling the Model 3, which quickly became its top-selling car. He notes that the Model 3 was Tesla’s first vehicle priced below $70,000, and when it was released in mid-2017, Tesla stock was trading at around five times next year’s sales. Then in 2018, the Model 3 became the best-selling luxury car, which helped pave the way for Tesla’s next car in a similar price range, the Model Y, released in 2020. The success of those models ultimately helped prove Tesla was a serious competitor to traditional carmakers. (Shojaee, who also runs a financial data website for investors, first started buying Tesla stock in 2015 and rode its run until a couple years ago, after it surpassed a $1 trillion market capitalization.)
While forecasts for Rivian’s R2 sales vary wildly, Scaringe said in November that Rivian is preparing its existing production facility in Illinois to pump out up to 215,000 cars a year, including 155,000 R2s, if the plant runs at full capacity.
The company is also building a new production facility in Georgia, which it says will be up and running in late 2028, that should support additional production of up to 400,000 cars annually, split between R1s and R2s, according to Scaringe.
Shojaee is bullish, suggesting that demand for the R2 will exceed Rivian’s production capacity. The R2 will be the first real competitor to Tesla’s Model Y, he says, which sells about a million a year.
“So the question is, can Rivian sell 200,000 vehicles? That, to me, is a no-brainer. Of course it can, at a similar price point and as an alternative,” he says.
Rivian grew its top line 167% in 2023 and another 12% in 2024, to about $5 billion. Shojaee thinks Rivian can accelerate revenue growth to 50% in 2026 and maintain that rate in 2027. Most other car companies are too big to post that kind of revenue growth, he notes.
Tesla’s Slowdown
Tesla, in contrast, is hardly growing anymore after years of deceleration. Its revenue stayed flat in 2024, at $98 billion, and analysts polled by Koyfin reckon it shrank to $95 billion in 2025. Tesla said last Friday that it shipped 9% fewer vehicles last year.
While some of Tesla’s sales decline is likely due to a consumer backlash against Musk’s political maneuvers, some is also due to the disappearance of federal tax incentives that had encouraged U.S. residents to buy EVs. Whatever the cause, Rivian appears to be suffering more: Its 2025 vehicle deliveries fell 18%, it reported last Friday.
But a better way to compare Tesla and Rivian is to look at Tesla’s shipments of its luxury vehicles, the Model S, Model X and Cybertruck, which most closely resemble Rivian’s cars in production today. Those shipments fell 40% last year for Tesla. That suggests it might be losing its grip on the high-end U.S. buyer to Rivian.
The recent drop-off in demand for EVs has sparked talk that consumers, especially in the U.S., might be losing interest in the sector. One result is that traditional automakers have less incentive to invest in EV projects, as demonstrated by Ford’s decision late last year to scale back its EV plans.
But there’s reason to be optimistic about a longer-term rebound in EV demand, even without subsidies for buyers, chiefly because they are typically less costly to maintain. Basic maintenance each year for a Rivian vehicle in particular costs about one-third what it might for a car with an internal combustion engine, according to a review from ConsumerAffairs website.
Consulting firm EY predicted in a September report that although EV sales in the U.S. would drop in the near term as a result of higher tariffs, expiring incentives and legislative uncertainty, they will eventually grow to make up half of U.S. car sales—up from less than one-quarter today—by 2039.
And while Tesla is Rivian’s big rival now, Tesla’s focus on humanoid robots and robotaxis suggest the threat it poses to Rivian will shrink in the next few years. Outside the U.S., Chinese EV giant Byd could prove a fiercer competitor. (So far, high tariffs and geopolitical tensions have prevented Chinese automakers from expanding aggressively in the U.S.) But Rivian is gearing up to start selling its cars in Europe starting in the next few years, Scaringe has said, which will pit it against Byd.
The R2 also gives Rivian a path to profitability. It ran a net loss of $4.7 billion in 2024, less than in 2023 but a bit more than in 2021, which was an especially hot year for EV sales worldwide. However, the company is making progress: The quarter ended September 2025 was only the third in Rivian’s history as a public company in which it had a positive gross profit margin. It bodes well that Scaringe has said that based on current contracts with Rivian’s suppliers, the materials needed for the R2 should cost about half as much as those for the R1.
Still, it could be a while before Rivian starts generating free cash flow. The company produced just over $1 billion in operating cash in the nine months to September but spent about $1.6 billion in capital expenditures during that period. Scaringe predicted in November that Rivian’s capex spending would rise in 2026 as the company builds out its plant in Georgia.
Outside of selling EVs, Rivian could reap the benefits of its investment in developing autonomous driving software. It already sells other software tools, including electric vehicle operating systems, to Volkswagen, and it has plans to roll out a new, paid self-driving software subscription to Rivian owners early this year. Rivian isn’t alone in selling its technology, as Nvidia made clear at the Consumer Electronics Show earlier this week when it unveiled its own autonomous driving software. But Rivian can add its tech to its own vehicles, which gives it more of an upside than Nvidia.
Rivian’s software and services unit, which includes its autonomous driving software as well as tools for vehicle marketing and insurance, increased revenue over 300% in the September quarter, in which it comprised more than one quarter of Rivian’s sales.
Rivian is “going to be a $100 billion company someday, and that someday may take one year for it to come, it might take three years for it to come, but it’s probably not going to be more than that,” said Shojaee.
Trump Presses Oil Executives to Invest in Venezuela—but Gets Lukewarm Reception
Exxon CEO says the South American country is currently ‘uninvestable’ and plans to send a technical team to assess the situation on the ground
President Trump urged oil executives to invest in Venezuela, aiming for at least $100 billion in spending to boost oil production.
Oil executives, including Exxon and ConocoPhillips, require security guarantees and legal overhauls before committing to new investments in Venezuela.
WASHINGTON—President Trump pressed executives from nearly two dozen oil companies Friday to plant flags in Venezuela and drill into one of the world’s largest oil bounties. Most of those executives stopped short of making public pledges to quickly invest.
Gathering at the White House less than a week after the U.S. incursion in Venezuela, executives from Chevron CVX 1.80%increase; green up pointing triangle—the only U.S. oil company active there—Exxon XOM 1.38%increase; green up pointing triangle Mobil, ConocoPhillips COP -1.23%decrease; red down pointing triangle and other companies signaled a willingness to examine new prospects in the Latin American country. However, they indicated they need security guarantees and an overhaul of Venezuela’s legal and commercial framework to consider diving in.
Trump said the U.S. government would provide the companies with security guarantees, but it was clear he wanted companies to push into the country. At the start of the meeting, Trump said he intends American oil companies to spend at least $100 billion in Venezuela boosting oil production.
“If you don’t want to go in, just let me know because I’ve got 25 people that aren’t here today who are willing to take your place,” Trump told the executives. He also said the U.S. and Venezuela are “working well together” to rebuild the country’s oil-and-gas infrastructure.
The public part of the meeting, which was televised, featured cabinet members and oil executives sitting in a large horseshoe in the East Room of the White House. At the end, Trump asked the press to leave the room and said he would begin negotiating with the executives to strike a deal.
In the private portion of the meeting, executives from the big oil companies took a tone similar to their earlier assessments, according to people familiar with the matter.
The oil executives expressed public support for the idea that they could find plenty of valuable crude in the Latin American country, but noted significant hurdles preventing them from making immediate commitments.
Exxon CEO Darren Woods said Venezuela is currently uninvestable without significant changes to the country’s commercial frameworks, legal system and hydrocarbon laws. He expressed confidence those changes can be put in place with the Trump administration and Venezuelan government working together.
“We’ve had our assets seized there twice,” Woods said. “You can imagine to re-enter a third time would require some pretty significant changes from what we’ve historically seen here and what is currently the state.”
As the longer-term issues are being resolved, Woods said Exxon could have a technical team visit to assess the current state of Venezuelan assets within the next couple of weeks. Exxon first entered Venezuela in the 1940s but hasn’t been active there for almost two decades, he noted. He said Exxon could assist getting Venezuelan crude to market through its integrated businesses, which include refining and trading.
“It has to be a win-win-win proposition” for shareholders, for the government of Venezuela and for the people of the country, he said.
ConocoPhillips CEO Ryan Lance, meanwhile, noted his company is the largest nonsovereign credit holder in Venezuela today. Asked by Trump how much the firm had left behind in the country, Lance said it was $12 billion.
“We’re not gonna look at what people lost in the past because that was their fault,” Trump said, before adding, “You’re gonna make a lot of money, but we’re not going to go back.”
One of the questions swirling in the industry this week was whether Trump, as part of his plan to encourage them to return, would pledge to make whole Exxon and ConocoPhillips, which left the country in 2007 when Hugo Chávez nationalized their oil assets. The companies are still seeking to collect on most of those debts.
As for Chevron, Vice Chairman Mark Nelson thanked Trump for his leadership and for keeping American energy at the top of his agenda. He said the company has brought its production in Venezuela to 240,000 barrels a day at its four joint ventures and can boost output relatively quickly.
“I think we have a path forward here very shortly to be able to increase our liftings from those joint ventures 100% essentially effective immediately,” he said.
Nelson stood in for Chevron Chief Executive Mike Wirth who had a knee replacement earlier this week.
Trump opened the meeting by saying he wished his White House ballroom project had been completed in time to accommodate other oil-industry executives who wanted to attend Friday’s event. He added an apology to those the White House couldn’t accommodate.
Among those who did attend were some of Trump’s close oil-industry allies and donors such as billionaires Harold Hamm of Continental Resources and Jeff Hildebrand of Hilcorp.
Hamm, a staunch ally and wildcatter armed with private capital, expressed enthusiasm about the prospect of exploring in Venezuela but noted that the country has challenges and didn’t commit to investing there.
Hildebrand, who has amassed his fortune buying assets on the cheap, cutting costs and then squeezing out both oil and profit from wells, said Hilcorp is fully committed and ready to go rebuild the infrastructure in Venezuela.
Asked by Trump if Hilcorp would be going to Venezuela, he responded: “Yes.” It was one of the few explicit commitments made by an oil CEO whose company isn’t currently active in Venezuela.
Restoring Venezuela’s oil production to its former glory would likely require tens of billions of dollars, analysts say. Years of negligence, under investment, mismanagement and corruption have led to a dilapidation of oil-and-gas fields that would require a comprehensive overhaul of the country’s infrastructure.
Major investments in the country’s ailing oil sector would be far more likely and sustainable under a democratic government there, said Ricardo Hausmann, a former Venezuelan planning minister.
“The Trump team seems to be betting on an oil recovery before a transition. I think it should be the other way around. Rules of the game set up by a discredited Chavista regime at the barrel of a U.S. gun would have very little legitimacy for Venezuelans,” he said. “They would also need the human capital down there, but many Venezuelans with experience in the oil industry wouldn’t return unless there is a transition.”
The Trump administration is working on a plan to exert some control over Venezuela’s state-run oil giant, Petróleos de Venezuela, or PdVSA, including acquiring and marketing the bulk of its oil production, The Wall Street Journal reported this week. The president has raised the prospect of lowering oil prices to $50 a barrel—a level that would be too low for oil companies to profitably invest in Venezuela.
Others in attendance at the meeting, such as refinery operators Valero and Marathon Petroleum, would benefit from access to cheap Venezuelan crude that they can turn into fuel at their Gulf Coast facilities. Those refineries are designed to take heavy crude from Canada, Mexico and Venezuela.
“We have the ability and the capability of our assets to process Venezuelan crude and the people of Marathon Petroleum stand ready to do so,” said Maryann Mannen, the company’s CEO.
The Week’s 10 Biggest Funding Rounds: xAI Leads As 2026 Is Off To A Brisk Start
After a big year for venture investment, fueled by the AI boom, 2026 is not showing signs of a slowdown. Quite the contrary, with the first full week of the year bringing us a whopping $20 billion new funding round for Elon Musk’s xAI. We also counted multiple rounds of over $100 million that look miniscule by comparison but are actually very large by traditional venture standards.
1. xAI, $20B, generative AI: Musk’s xAI, the generative AI startup known for its Grok chatbot and the parent company of X (formerly Twitter), said it secured $20 billion in Series E funding from a long list of venture and strategic investors. Founded in 2023, xAI has raised $42.7 billion in reported debt and equity funding to date, per Crunchbase data.
2. Parabilis Medicines, $305M, precision medicines: Cambridge, Massachusetts-based Parabilis Medicines announced that it raised $305 million in a Series F financing co-led by RA Capital Management, Fidelity, and Janus Henderson Investors. The financing will support continued clinical development of its peptide platform for cancer therapeutics.
3. Soley Therapeutics, $200M, biotech: Soley Therapeutics, developer of a cell stress sensing platform and a pipeline of therapeutics for neurodegenerative disorders and metabolic diseases, closed on $200 million in Series C funding. Surveyor Capital led the financing for the South San Francisco, California-based company.
4. LMArena, $150M, AI: San Francisco-based LMArena, a platform for evaluating AI models and systems, picked up $150 million in fresh funding. Felicis and UC Investments led the financing, which set a $1.7 billion post-money valuation, nearly triple the value at its seed round in mid-2025.
5. Diagonal Therapeutics, $125M, biotech: Diagonal Therapeutics, a biotech developing disease-modifying clustering antibodies that correct dysregulated signaling in severe genetic diseases, raised $125 million in Series B funding. Sanofi Ventures and Janus Henderson Investors led the financing for the Watertown, Massachusetts-based company.
6 (tied). Lyte, $107M, physical world AI: Mountain View, California-based Lyte, a startup focused on integrated perception for robotics and AI, emerged from stealth this week and disclosed it has raised $107 million in aggregate funding. The company says its mission is to “give robots the ability to see, understand, and operate safely in the physical world.”
6 (tied). EpiBiologics, $107M, biotech: EpiBiologics, a company working on tissue-selective extracellular protein degradation, said it completed a $107 million Series B financing. Google Ventures and Johnson & Johnson Innovation co-led the round for the San Mateo, California-based company.
8 (tied). Cambium, $100M, advanced materials: El Segundo, California-based Cambium, a startup developing advanced materials for defense, aerospace, and other sectors, secured $100 million in a Series B round led by 8VC.
8 (tied). Rakuten Medical, $100M, cancer therapeutics: Rakuten Medical, a San Diego-based startup focused on photoimmunotherapy for cancer treatment, raised $100 million in Series F financing led by TaiAx. The company is currently enrolling patients into its global Phase 3 trial for recurrent head and neck cancer.
10. Pomelo Care, $92M, virtual care: Pomelo Care, a virtual healthcare provider for women and children, raised $92 million in a Series C funding led by Stripes. The financing set a $1.7 billion valuation for the New York-based company.
US oil giant ExxonMobil tells Donald Trump Venezuela is ‘uninvestable’
Chief executive Darren Woods pushes back against president’s call to rush back into troubled country
ExxonMobil has warned that Venezuela remains “uninvestable” without “significant changes” in a rebuke to Donald Trump’s call for oil companies to pour billions of dollars into revitalising its oil industry.
Darren Woods, chief executive of the biggest US oil major, struck a sceptical tone at a televised White House gathering of energy bosses on Friday — even as some other companies expressed optimism about the potential to tap the world’s biggest oil reserves.
“If we look at the legal and commercial constructs, frameworks in place today in Venezuela, today it’s uninvestable,” Woods told Trump in a meeting that included many of America’s most prominent energy executives and some of the president’s top lieutenants.
“Significant changes have to be made to those commercial frameworks, the legal system, there has to be durable investment protections, and there has to be change to the hydrocarbon laws in the country.”
Woods said the company’s assets in Venezuela had been seized twice since Exxon first entered the country in the 1940s.
His remarks underline how the biggest energy groups remain reluctant to rush into making big capital commitments in Venezuela even as Trump seeks to cajole them into pouring “at least $100bn” into the country to increase production and drive down US oil prices.
The meeting came less than a week after Trump launched an audacious operation to capture strongman leader Nicolás Maduro in Caracas and claim control of the country’s vast natural resources.
Trump told the executives he would decide which companies were allowed to enter Venezuela and that they needed to make a decision quickly. “If you don’t want to go in, just let me know, because I got 25 people that aren’t here today that are willing to take your place.”
The FT reported this week that the industry was unlikely to commit to making big investments in Venezuela without legal, financial and security assurances from Washington.
Other oil executives gathered at the White House — including services groups and those that already have operations on the ground — were more receptive to the president’s overtures, suggesting some level of capital could flow into the country in the near term.
Chevron said it could boost production by 50 per cent within 18 to 24 months by expanding its existing operations, which pumps about 240,000 barrels per day. Shell boss Wael Sawan said the European oil major had “a few billion dollars’ worth of opportunities to invest in” subject to the US providing waivers to its sanctions. “We are ready to go,” he said.
Spain’s Repsol said it could triple its production to more than 150,000 b/d within two to three years. Eni, which has about 500 people working in Venezuela, said it had 4bn barrels of reserves in the country and was ready to boost investment.
When pressed by Trump, Woods said Exxon would send a technical team to Venezuela within weeks to assess conditions. He also said he was “confident” that the changes needed for investment “can be put in place”.
Harold Hamm, founder of Continental Resources and a longtime Trump ally, declined to make any commitments to invest in Venezuela even as he described its vast reserves as a “real jewel”.
Asked directly by Trump if he planned to inject capital into the country, Hamm said Venezuela was a “very exciting thing” with “challenges” that he said the industry “knows how to handle”.
The mixed messages from executives on Friday emphasise the complexities faced by oil companies as they weigh how to respond to Trump’s calls to inject capital into a country that remains unstable and where many of them were burned by expropriations in recent decades.
“The legal, political and geopolitical risks of going into Venezuela to make the sort of large investments that the administration seems to want are very significant,” said Meghan O’Sullivan, a Harvard professor and expert on geopolitics and energy.
But even as he sought to convince them to make sweeping investments, Trump appeared reluctant to make any significant concessions to the oil companies about reimbursements or financial guarantees.
The president made clear that companies that had assets seized in the past were unlikely to receive compensation. He told ConocoPhillips chief executive Ryan Lance, whose company lost $12bn to expropriations: “You’re going to make a lot of money, but we’re not going to go back.”
“We’re going to start with an even plate,” Trump said. “We’re not going to look at what people lost in the past because that was their fault. That was a different president.”
Trump also appeared to rule out using US tax revenues to reimburse companies for investing in Venezuela, something he had previously floated, telling the executives they “don’t need government money”.
“Our giant oil companies will be spending at least $100bn of their money — not the government’s money,” he said.
When asked later about financial backstops for the companies, Trump said he hoped these would not be needed. But he signalled the US government could provide some form of security and legal guarantees, which have been crucial demands by the industry. “You’ll have total safety.”
However, Trump suggested the Venezuelan regime, rather than US troops, would provide security on the ground. “I think the people of Venezuela are going to give you a very good security.”
Legal experts said there was “significant interest” among companies in potential investments in Venezuela, but that it would take big undertakings before that was converted into action.
“The dilemma at the moment is that the landscape hasn’t settled yet, there are logistical and political challenges,” said Carlos Solé, co-chair of law firm Baker Botts’ Latin America practice.
He said that much needed to change before companies took action, including making it easier for US businesses to get licences or sanctions waivers from the Office of Foreign Assets Control to carry out transactions in the country.
Aurelio Fernandez-Concheso, the head of law firm Clyde & Co’s Venezuela office, said he had received many calls from clients in the oil and gas, transport and insurance industries about doing business in the country but that there was “a lot of caution about how it will develop”.
“It’s one thing to pick up the phone and call an adviser, and it’s a different thing to write a cheque and put money into the country.”
How do you value a company like Nvidia?
It’s the poster child for AI, but surely its shares are too expensive now
- Invert the P/E Ratio: Value it as a cyclical semiconductor play; sell when earnings peak and P/E ratios appear deceptively "low" or "cheap."
- Discount for "Lean AI": Factor in the rise of hyper-efficient models like DeepSeek and custom "saloon car" chips from Alphabet that threaten Nvidia's 60% margins.
- Power-Constrained Modeling: Use global energy grid capacity as the ultimate cap on revenue growth, as data center expansion now depends on electricity rather than just chip demand.
The new year has started in much the same way as the last one ended: with a lot of talk about bubbly valuations. The fact the S&P 500 hit an all-time high this week, didn’t help.
But how do you value what is undoubtedly the stock of the decade?
Nvidia, the world’s most valuable company, has seen its share price rise over 3,000 per cent since the start of 2020. It’s now worth $4.5tn.
But is it really?
The company has risen from being the leading maker of semiconductors for gaming consoles to being the leading processor for bitcoin mining and, now, the poster child of AI.
These successes spring from the decision by founder and chief executive Jensen Huang many years ago to use parallel processing of data, which made Nvidia’s chips faster and more energy efficient than its rivals.
More recently that has made them the first choice for AI “training” — giving Nvidia power to raise prices and lifting operating margins from the mid-teens a decade ago to about 60 per cent last year.
The company should make an operating profit of more than $120bn this year — more than the total value of all but the four biggest FTSE 100 companies. Its recent $20bn deal with AI chip start-up Groq is expected to help maintain its position in the high specification part of the market.
But are its shares now too expensive? (Spoiler alert: we don’t own Nvidia.)
The first consideration is the competition. It may help to think of Nvidia chips as high-end sports cars. Great if you want huge power. But it’s dangerous to assume AI’s future is dependent on all that roar and thrust.
When the Chinese DeepSeek AI engine appeared last year, Nvidia’s shares sold off sharply, as DeepSeek’s results seemed comparable with those of OpenAI (Nvidia’s largest client) and apparently involved fewer expensive, high-end chips. DeepSeek has started 2026 with a research paper offering a more efficient way of training large language models, which may further reduce reliance on the most powerful chips.
Alphabet has developed its own Tensor chips (think decent saloon car). Only a couple of months ago it launched its Gemini 3 AI model, powered by these. Elsewhere, Anthropic AI relies largely on chips designed by Alphabet and Amazon (AWS).
The Gemini 3 and Anthropic models both outscore OpenAI’s ChatGPT in some criteria. This helps explain the 60 per cent rise in Alphabet’s share price last year. (I confess that we missed much of this, wrongly believing Alphabet would be challenged by AI and the Department of Justice probe. We have remedied this now.)
In valuing Nvidia you can’t ignore OpenAI. Nvidia intends to supply its client’s data centres with over $100bn of Nvidia chips. It’s too cynical to regard this arrangement as part of a “Ponzi scheme”, which some have done — it’s sensible to back important commercial partners. But OpenAI isn’t expected to make an actual profit this decade, so we count this element of Nvidia’s future income as part revenue, part loan.
Next up is the energy issue. The current “training” phase for AI chips involves them learning patterns in huge datasets and uses massive amounts of electricity. And there’s the rub. Power limitations could pull the plug on the heady revenue growth numbers underpinning many AI stock forecasts. There are no easy solutions. Build an adjacent gas turbine? Sorry, manufacturers have sold out even before you apply for planning permission. Some data centre companies have begun repurposing jet engines, but this looks an expensive workaround.
If Anthropic floats on the Nasdaq this year it will be valued on hoped-for future cash flows. Power constraints could undermine sales and hit those valuations substantially. It’s a good illustration of how a stock market boom can peter out when exposed to the dull light of reality.
Valuing semiconductor stocks is always tricky. An old mate of mine compares it with valuing cement companies — both industries are capital-intensive and cyclical. These are not buy-and-hold stocks. Buy them at the bottom of the cycle and sell at the top.
Perhaps counter-intuitively, when their earnings have plunged, their share price/earnings ratio may look ridiculously high for a while — that’s when you buy. Similarly, low-looking price/earnings ratios come at the cycle peak, so you sell when price/earnings ratios look low.
Nvidia outsources the manufacturing of its designs, thereby avoiding the eye-watering capital costs of building fabrication plants. So it’s less capital-intensive than it might be. And AI should keep chip demand — and therefore sales — growing for a while. Huang’s speech in Las Vegas this week focusing on the power of Nvidia’s latest chips and its role in robotics may have reassured some investors that sales growth will continue, but if margins have peaked that could have little impact on profits.
To my mind, the AI boom is moving to its next phase, which could benefit other AI-related stocks we own, such as Broadcom and Taiwan Semiconductor. These have been doing nicely. We also have sizeable holdings in Alibaba and Baidu, Beijing’s AI champions.
Apple, which we bought a few months ago, appears to be leaving the big spenders to develop the cutting-edge stuff, using more third-party AI technology within its products. This hybrid strategy could prove smart.
Some so-called “AI losers” could turn a corner in 2026. Software companies, such as holdings Salesforce and SAP, have been seen as threatened by AI, but it could instead enable them to enhance significantly what they offer.
The year ahead will be interesting. I’ll undoubtedly have got some of this wrong — I wasn’t taught divination at school. But over the years I’ve found buying sensible stocks at a sensible price and diversifying is a reliable investment strategy. I like Nvidia, but I don’t think it’s a sensible price. And I think there are better alternatives from an investment perspective.
UK’s ‘star’ stockpickers underperform as they fail to beat cash
Active managers such as Nick Train and Terry Smith have struggled amid the rise of passive funds and US tech stocks
The UK’s most prominent “star” stockpickers delivered lower returns than cash last year, as many active fund managers struggled to compete with passive index trackers and the rise of US technology stocks.
Nick Train, who manages the £1bn Finsbury Growth and Income Trust, suffered a difficult year in which the trust’s net asset value fell 7.5 per cent to the end of November, according to the latest factsheet.
Train’s £1.5bn Lindsell Train UK Equity Fund fell 7.2 per cent over this period, underperforming the FTSE All-Share index, which returned 21.4 per cent.
Shareholders in his trust will vote next week over whether to replace him as manager, the first such vote in its 100-year history.
Terry Smith, another of the UK’s best-known fund managers, said in a letter to shareholders this week that his flagship Fundsmith Equity fund returned 0.8 per cent in 2025 — less than the return on cash of 4.2 per cent.
Both fund managers have stood out over the years for delivering strong longer-term results by focusing on so-called quality stocks that show signs of promising growth prospects.
Train’s UK Equity fund has returned 8.6 per cent a year on average since it launched in 2006, while Smith’s has provided 13.8 per cent since its launch in 2010.
“It’s been a tough period for the UK’s most prominent managers, and the two that are regularly mentioned are Nick Train and Terry Smith, both of whom have endured quite a long run of underperformance,” said Jason Hollands of wealth manager Evelyn Partners.
“That has tested patience, although both have over the longer run added a lot of value for their investors, especially if you’ve been with them since the inception of their lead funds.”
Smith said in his annual letter to shareholders that the surge of money into index-tracking funds and the dominance of the US technology stocks had weighed on his fund, which only holds three of the big tech players — Meta, Microsoft and Apple.
Train said: “We remain convinced that the investment opportunity we have captured in the portfolio offers significant upside, as well as being highly differentiated.
“Contrary to common perceptions, we believe the UK is home to many genuinely world class global growth businesses, capable of delivering multi‑decade growth in earnings and dividends to their shareholders.”
But the underperformance has put the spotlight on fees and has raised questions over whether the era of the star fund manager is over.
Train’s UK Equity fund has an ongoing charge, or management fee, of 0.67 per cent, while Smith’s charge is 1.04 per cent. By comparison, the cheapest trackers following the MSCI World index and FTSE All-Share index charge less than 0.1 per cent.
“The era of the star manager has been on the wane for some time and reputationally a huge blow was the whole Woodford debacle,” said Hollands, referring to the closure of former fund manager Neil Woodford’s £3.7bn Equity Income fund which led to thousands of investors nursing losses.
Marcus Blyth, of wealth manager Rathbones, said: “The label of a star fund manager is achieved after a period of excellent performance, where essentially the stars have aligned for the investment process the fund manager applies and the stocks they select.
“Post the global financial crisis, growth investing was in the ascendancy and this provided an environment that flattered many fund managers. They simply could do no wrong.
“Then 2022 hit and it provided a humbling experience for many. Since then, a resurgence in value stocks, higher interest rates and momentum in a small subset of AI related companies have left many of these ‘star managers’ significantly lagging and investors questioning their approach.”
Beating Back the Bubble: A Defensive Fund Portfolio for These Times
Spreading your bets among a host of different sectors can help protect you in a down market.
Like snowflakes, every stock market bubble is unique. But historically, there have been two kinds of crashes when a bubble pops. One hits a particular sector especially hard, as in the 2000-02 dot-com collapse. The other is systemic, where everything goes down, as in the 2008-09 financial crisis.
While artificial-intelligence stocks have recently taken some lumps, many are still highly priced, so much so that many investors still see a bubble. Other sectors are catching up, and some fear that the entire market is in treacherous territory.
Some $3 trillion is now invested in the three largest S&P 500 index funds, with trillions more in similarly run funds. The S&P 500 currently has a hefty 35% tech weighting, but even that understates the AI-related concentration, as the benchmark categorizes Google parent Alphabet and Facebook parent Meta Platforms as part of the “communication services” sector, and Tesla and Amazon.com as “consumer cyclicals.” Meanwhile, the index’s biggest stocks are almost all AI-related.
Brian Kersmanc, a portfolio manager at GQG Partners, co-wrote a recent report titled “Dotcom on Steroids,” which explained why the firm thinks the market’s AI frenzy is worse than the dot-com bubble. “The trifecta of rich valuations, increasing macro risk, and—perhaps most importantly—deteriorating company fundamentals is very dangerous,” the authors wrote.
As recently as December 2023, Kersmanc and the rest of GQG team—which oversees $167 billion—were bullish on U.S. tech, with the sector’s current darlings constituting some 38% of their popular $3 billion GQG Partners US Select Quality Equity fund. Today, the same fund holds 2.6% in tech and 23% in regulated utilities.
If the GQG team is right, investors need to find ways of diversifying their portfolios to protect themselves. But even if it isn’t, investing in funds that aren’t exposed to the AI trade can still be profitable as the rally continues.
Rebalancing
The concentration in index funds worries experts, but that doesn’t mean investors should dump them. “If you look at anything exposed to AI, it’s about half of the market, and the Magnificent Seven [stocks] are about 35% of the S&P,” says Jurrien Timmer, director of global macro at Fidelity Investments. “That’s one of the most concentrated [index portfolios] in history, although we’ve had periods, especially in the 1950s and ’60s, when that concentration persisted for a very long time without an adverse outcome. So, it’s very hard to time these things. You can’t just say, ‘I need to get out of this space,’ because it can remain concentrated.”
The Bonds Buffer
Yet even as the S&P 500 surged 96% in the past five years, the popular Bloomberg U.S. Aggregate Bond Index lost 2%. Normal rebalancing helps diversification. If you have a traditional 60% stock/40% bond portfolio, reducing some of your S&P 500 position to buy a fund like the iShares Core U.S. Aggregate Bond ETF could help protect you in a down stock market.
Bonds didn’t work as diversifiers in 2022’s inflationary downturn, but that was a different time. Interest rates at 2022’s start were close to zero, as were bond yields. “The starting yields in actively managed diversified [bond] portfolios are about 6% now,” says Mohit Mittal, Pimco’s chief investment officer of core strategies and a manager of the Pimco Total Return fund. “The yield is a strong indicator of forward-looking returns.”
Mittal points out that the S&P 500’s Shiller price/earnings ratio —a valuation based on inflation-adjusted earnings—is now 40. “Historically, if you look at the data from the 1900s to now, there have been four episodes when we have had [valuations] this high,” he says. “Then, when you look at the subsequent three- to five-year returns with these starting valuations, they’ve ranged from, at the very worst, a Depression-era type period of -15% to -17% annualized, to even in the best case, 4% to 5% annualized.” Given Mittal’s 6% starting point for bond yields, high-quality bonds look attractive.
There are caveats. Bonds don’t do well when investors are worried about sudden inflation spikes, as they were this past April. Almost everything declined then, including bonds.
A 2008-style credit crisis would also mean trouble. One of the reasons Kersmanc fears that the AI bubble could cause a systemic crash is that previously high-quality tech companies are now issuing a lot of debt to finance their data centers. Worse, some are using opaque, off-balance-sheet “special purpose vehicles” to house the newly issued debt without affecting their credit ratings. Such SPVs were instrumental in causing the 2008 crash.
Given that index funds don’t exclude bonds with such off-balance-sheet deals, it’s safer to buy actively managed bond funds today.
Foreign Correlation
Timmer calls international stocks “the low-hanging fruit of diversification” because of overseas markets’ lower valuations and correlations to U.S. stocks. But there can be risks of AI irrational exuberance overseas, too, making sectors worldwide move in tandem. In Kersmanc’s largest charge, Goldman Sachs GQG Partners International Opportunities, he has been trying to sidestep those sector risks.
One way to find good diversifiers is to look at a fund’s correlation to the S&P 500, as measured by its R2 score, which calculates the percentage of an investment’s movements that mirror changes in its benchmark index. Another is to look for lower-than-average weightings in the major AI sectors—tech, communication services, and consumer cyclicals. Next, see how the fund has performed both in down markets and overall. The Portfolio Visualizer website allows you to enter funds’ ticker symbols and see how correlated they are over different time periods.
Consider Moerus Worldwide Value. It has 0% invested in technology and communication services, a low average P/E ratio of 12, strong returns, and little correlation with the S&P 500. Over the past three years, the fund had an R2 of 0.64, indicating a 64% correlation with the iShares Core S&P 500 ETF, low for an equity fund. Moerus was up 6% in 2022 when the iShares ETF was down 18%.
Moerus manager Amit Wadhwaney looks for cheap companies that often have imminent payoffs via restructuring, dividends, or share buybacks. Such companies are typically the polar opposite of AI stocks, which are valued on “long-dated payoffs, which, in my mind, are largely conjectural,” he says. “We look at very different stocks in different geographies from most people.”
There are individual countries’ markets that are less correlated to the U.S., and smaller companies tend to move less in step with global markets. The WisdomTree Japan SmallCap Dividend ETF has a 49% three-year correlation with the S&P 500 versus the large-cap iShares MSCI Japan ETF’s 73%, and it has actually been a better performer in downturns like 2022’s.
Historically, emerging markets have reacted more harshly to U.S. downturns than developed ones, but the risks may not be as great today. “I don’t think anybody should kid themselves that emerging markets are a safe haven asset now, but I think that going forward, they are much less volatile than they used to be,” says manager Paul Espinosa of the top-performing Seafarer Overseas Value fund. One reason he cites is that many countries’ monetary and fiscal policies are more disciplined than they were in the past—and low valuations also help. (For more on emerging markets, see the Funds column here.)
Value Stocks
Timmer says buying U.S. value stocks now is like shorting or betting against the Magnificent Seven. Lately, when the S&P 500 has declined, value stocks, and especially dividend-paying value stocks, have fallen less but then trailed when the market has rallied.
One example is the popular Schwab US Dividend Equity ETF, which was up a mere 4.5% in 2025. In the past 12 months, the Schwab ETF’s correlation with the S&P 500 ETF has been a low 26%, when over the past three years, it’s a much higher 66%.
Dividend-oriented managers have noticed this disparity. “When you start with a portfolio with a 3.5% or 4.5% dividend yield, and you’re looking for sustainable, defensive dividend growth, you’re going to end up with a portfolio that, from a sector perspective, almost looks like a photo negative of the S&P 500,” says Jared Hoff, who manages the Federated Hermes Strategic Value Dividend fund. The fund requires such high dividend yields that it has 0% in tech, but double-digit-size holdings in utilities, healthcare, energy, financial services, and consumer defensive stocks.
Hoff’s fund has paid the price for this divergence—it lags behind the S&P 500 and other value funds. But it’s an excellent diversifier, having gained 8.1% in the brutal 2022 market, and it was up 15.3% in 2025. It’s also worth considering the Schwab ETF or the Federated Hermes U.S. Strategic Dividend ETF.
Alternatives
Gold bullion is a classic alternative investment, but isn’t cheap after surging in 2025. A diversified commodity futures fund like AQR Risk-Balanced Commodities Strategy or USCF SummerHaven Dynamic Commodity Strategy No K-1 might be a better bet. “If you look at the commodity charts right now, and how low oil prices are and how strong copper prices are, I think there’s a case to be made that the broader commodity complex is going to take the lead,” Timmer says. “Commodities are negatively correlated, or uncorrelated, to both stocks and bonds,” making a commodity fund a “perfect diversifier.”
There are also funds designed to replicate hedge funds that are uncorrelated to the broad market. But the strategies can be opaque and often depend on leverage for their execution, so trust in management is essential. The two most well-known shops in the public alt-fund space are BlackRock and AQR.
The BlackRock Global Equity Market Neutral fund has been on fire of late, up 18.1% in 2025, despite the fact that it neutralizes its market correlation by betting equally for and against stocks, so the long and short side of the portfolio balance out. The fund had virtually no correlation with the S&P 500 in the past three years.
Sector Funds
Perhaps the simplest way to diversify from the S&P 500’s tech weighting is to buy small satellite positions in different sector funds. Matthew Bartolini, State Street Investment Management’s global head of research, makes a case for finding the right ones for different economic environments in his Sector Business Cycle Analysis report, published in October.
According to State Street, the sectors tracked by the State Street Utilities Select Sector SPDR and State Street Consumer Staples Select Sector SPDR ETFs have the lowest correlations to tech in the past 27 years, only 3% and 5%, respectively. “They have a defensive bias and may work well in a slower economy where there’s more countercyclical forces,” Bartolini says.
Yet even this strategy has wrinkles. “Some utilities have been caught up in a lot of AI fervor,” Kersmanc says. Investors expect unregulated utilities to charge exorbitant prices to power AI data centers, but regulated utilities are safer.
And, of course, nothing would be perfectly safe in a systemic crash.