Why Nvidia’s boom isn’t a bubble

This is the conclusion of today’s morning letter, available to you in your inbox by 6:30am ET Monday through Friday, along with:

Did you think Yahoo Finance was done covering Nvidia’s stunning week of share price gains on the back of a stunning earnings release and longer-term guidance?

Well boy did you think wrong?

The question on my mind today is whether we are witnessing an old-fashioned stock price bubble at Nvidia.

I am inclined to say NO.

But I make a lot of caveats for investors who should be cautious about buying (or even thinking about buying) a stock whose market cap just surpassed $200 billion in a single trading session.

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For comparison, the total market cap of McDonald’s is $209 billion!

A stock price bubble could be broadly defined as a situation where the price of a stock deviates completely from reality and is trending upwards. This is often the case when a sexy investment thesis captivates the trading desks of Wall Street and drives the stock higher. Then small investors are enthusiastic and buy without doing their basic homework.

The uptrend feeds itself. Until that is no longer the case.

We’ve seen countless stock price bubbles over the past 20+ years.

There was the dot.com bubble when loss-making tech stocks like Pets.com were artificially propped up by sheer hype.

We had the cannabis stock bubble of 2020 and early 2021 hoping that federal legalization would bring big gains to loss-making pot newbies like Tilray and Canopy Growth.

At the height of the pandemic came the famous meme stock bubble, which saw seemingly overnight astronomical gains in GameStop, AMC, Bed Bath & Beyond, and other fundamentally weak stocks.

Artificial intelligence (AI) stocks have often felt sizzling this year, especially when you look at the fundamentals of the companies being hyped on trading desks, Twitter, and in chat rooms.

C3.ai announced last week that the company will lose approximately $68 million on an operating basis for the fiscal year ended April 30. Analysts expect the company to lose another $63 million in the new fiscal year.

C3.ai never turned a profit.

Still, the stock is up 160% this year. For this author, that’s too bubbly for my pants.

At first glance, Nvidia reviews many bubble boxes:

  • Market cap increased by more than $200 billion in a single session solely on the back of second-quarter revenue prospects that came in billions ahead of estimates. Missed: Revenue, operating income, and net income were all down year over year.

  • Easily sellable story for novice investors. Here’s the rationale: Nvidia’s generative AI chips are being used by companies like Meta and Microsoft-backed ChatGPT to change the world. So buy Nvidia stock.

  • Nvidia stock continues to ratchet up valuation multiples and hit new records based on future potential, which is just that – future potential unknown. Consider this: Nvidia stock is currently trading at a P/E of 112 times estimated earnings for the next 12 months. The broader stock market is trading at about 18.5 times as measured by the S&P 500.

Those are big numbers for a big story stock in 2023.

But unlike the bubbles mentioned here, Nvidia’s rise is a little different.

For one, Nvidia founder and CEO Jensen Huang has a strong track record of implementation. By my calculations, Nvidia has made $40.3 billion in adjusted operating income over the past six years. How did it do that? By being at the forefront of chip design for large areas such as gaming, automobiles and data centers.

Nvidia has created tangible things to accelerate the growth of really big companies, and it’s paid well for it.

Huang has stayed very measured when his company came on the scene based on what people who know him have told me over the years. I like that Huang doesn’t advertise out there, doesn’t give 10 interviews on win day, and doesn’t appear at 12 conferences a year. The guy sticks with the execution with all his might and doesn’t come out until he has something worth sharing.

This is real leadership.

And that brings me to my final point.

Nvidia proves it will be at the forefront of a true generative AI movement. You might giggle that I bought into the hype, but I talk to enough CFOs to know that they’re pouring huge amounts of money into AI development… and a large chunk of that money is being spent on powerful Nvidia chips.

“So this is a very, very big deal [AI] that we can help the world’s physical industry go digital for the first time,” Huang told our Julie Hyman and Dan Howley on Yahoo Finance Live in March.

Bubble properties on Nvidia? Secure. Will the corporation return to Earth? Secure. But to say that Nvidia is another long-term stock crash is probably missing the point.

“The AI ​​revolution is not hype as there will be big winners like Microsoft, Nvidia and Google and also clear losers on the AI ​​roadkill list,” Wedbush tech analyst Dan Ives told me via email.

All in a daily investment analysis.

Brian Sozzi is Editor-in-Chief of Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and further LinkedIn. Email [email protected]

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