By Nikolay Vanyov
In recent days, weeks and months, the news coming from the technology sector has been mostly optimistic. Apart from the over-dramatic moment related to the Chinese artificial intelligence DeepSeek, the results have been impressive, the horizons clear, and the huge investments in monetary terms appetizing for everything downstream. On the other hand, the situation in the automotive sector remains cloudy and has been facing a storm for years. The news includes a wide range of negative scenarios related to the chaos of Trump 2.0 tariffs, the structural problems of the sector in Europe, the wandering between ICE and electricity and the constant (but somewhat invisible) threat of China, which has been "flooding" one market or another for years.
Comparing these two sectors seems almost impossible, especially if one takes into account the fact that they are running on two completely different tracks in terms of speed and risk obstacles. But a glance at them can lead to valuable conclusions about both the development of financial markets and possible economic scenarios, with the caveat that nothing in this text is a recommendation for investment decisions.
Technology and Artificial Intelligence (AI) - the limit has long been not the sky but the universe
There is hardly an investor who does not own in their portfolio, directly or not, shares of the world's largest technology companies, all of them from the US. The acronym FAAMG (Facebook, Apple, Amazon, Microsoft and Google (Alphabet)) contains within it about 25% of the value of the broadest gauge of US markets, the S&P 500. Add in Nvidia, with a market capitalization of nearly $3 trillion, and that value approaches 30%. Let's look at some key metrics related to the stocks of these companies:
The US tech giants are making growing revenues, which is no surprise to anyone in view of the increasingly digitalised environment. What is more interesting is the efficiencies these companies are realising. In the general case of technology giants that are well diversified in terms of their portfolio of products and services, such as Microsoft, Meta and Alphabet, net profits are around and above 30% of annual revenues.
This is where Nvidia jumps to the fore, where net profit is over 50% of annual revenue. The reason for this is rooted in AI. This part of the tech sector has been in an extraordinary burst of investment in the last 2 years after OpenAI's ChatGPT seismically (and sensationally) changed the global economic picture. Quite predictably, all the tech giants have rushed to invest in their own AI-related projects. In this case, the companies that are investing are relatively far from the point of monetising their projects. In other words, Microsoft, Meta and Alphabet are currently making major investments (e.g. OpenAI's Stargate project is valued at a dizzying USD 500 billion) without being able to get immediate revenues from it. However, there is one company that could profit from the AI boom right now, and that's Nvidia. As providers of hardware (chips) with high computing power, Nvidia are the main partner of all AI investors. And as the market player with the highest share of the market, they set its rules. The result of all this is the company's serious net profit efficiency (over 50% in 2024).
Going one step further down the supply chain, we can compare this efficiency with the revenue and net profit of the Dutch ASML, who are a major global supplier of chip manufacturing technology, and who show an efficiency of just over 30%. All of this leads to the conclusion that it is Nvidia that is managing to skim off the entire cream of the profits of the AI boom right now.
Automakers - survival or?
Against the backdrop of sunny horizons in the tech sector, let's look at the picture for automakers:
With carmakers, nothing is cloudless. If we just look at the latest news from the sector, related to the duties of the new Trump administration (which wants to tax European manufacturers, thus aiming at a more serious penetration of American ones in EU markets), through a series of changes at the strategic level (the latest one being the replacement of the CEO of the Stellantis group), strategic decisions that are constantly changing (from ICE to electric vehicles and vice versa), the Chinese threat and the subsiding (but not passed) problems in supply chains.
All of this is leading to significantly lower efficiency for the world's five largest automakers. All of them have net profits below 10% of their revenues, with the only positive example coming from the largest manufacturer based on number of cars sold, Toyota. Including even the "star" of the sector, Tesla, does not change the picture. And yet the company's market valuation is more than double the total for the top five manufacturers.
Where one euro does not equal one euro
The facts show that the prospects lie with the tech giants, while the problems seem to be concentrated with the carmakers. Yet the markets seem to fail to take account of two significant factors. The first relates to the size of the manufacturers. In 2024, only Alphabet generates more revenue than the two largest manufacturers, Toyota and VAG. The lower revenue efficiency of the automakers in turn makes them a better value distributor in the supply chain (a significantly smaller share of profits remains with their shareholders). As employers, carmakers have a significantly greater weight in the global labour market.
Looking at market indicators, we can see that investors are willing to pay significantly more per €1 of profits to tech giants (from 55 times for Nvidia to 23 times for Alphabet). By comparison, for the largest car companies, this ratio is just 7 times for Toyota and less than 4 for all the others (and, of course, 162 for Tesla). It is clear that the problems seem to be concentrated in the automotive industrial sector. Yet this perceptible difference in market sentiment is, perhaps, subject to some correction. And when the picture is supplemented with share price gains, things look even more impressive (there is no tech giant that has not at least doubled in value over the last 5 years, while the maximum growth in carmakers is only 89% for Toyota).
All this comes not to portend a direct spillover of growth potential from one sector to another, even more so in those with serious structural differences, such as the technology and automotive sectors. But the difference in the speed of market development in their share prices, and the possibility that one sector may be at a kind of bottom in its development while the other is looking for a top, provide ample food for thought for investors. No recommendation for investment action.
