The rally in artificial intelligence chip stocks has seen investors continue to flock to names such as AMD (NASDAQ:AMD), Arm Holdings (NASDAQ:ARM), and especially NVIDIA (NVDA).
For Nvidia (NASDAQ:NVDA), the rise has been monumental. It has helped the company overtake Google's parent company, Alphabet, to become the third-largest US business, with a market cap of over $1.8 trillion.
But, according to analysts at Ranmore Fund Management, investors may want to be cautious with chip stocks at such high valuations.
Using the case of Cisco and investors looking to own "picks and shovels" stocks during the dotcom bubble, they warned that many people "overpaid trying to capture the momentum."
"People who own Nvidia because they make the ai' picks and shovels' may want to learn from this history," they wrote. "Because they're paying 40x sales."
"Unlike Nvidia, Cisco’s largest clients weren’t all working on their own solutions," they added. "And Cisco was working WITH China and China Telecom back then. Whereas Chips & China don’t mix well these days."
While they believe AI will change the world and Nvidia is the leader, the analysts warned investors not to pay any price for the picks and shovels stocks.