Why Nvidia’s boom isn’t a bubble

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Did you think Yahoo Finance was done covering Nvidia’s eye-popping week of stock market gains on the back of a mind-blowing earnings call and longer-term outlook?

Well boy did you think wrong!

The question that concerns me today is whether we are witnessing a good old stock market bubble at Nvidia.

I’m inclined to say No.

But I’m throwing out a ton of caveats for investors who should be careful about getting into a stock (or even considering getting into it) that just gained over $200 billion in market capitalization in a single trading session. negotiation.

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For perspective, the ENTIRE market capitalization of McDonald’s is $209 billion!

A stock market bubble could be loosely defined as a situation where the price of a stock becomes completely detached from reality on the upside. It’s often when a sexy investment thesis captivates Wall Street’s trading desks, sending stocks soaring. Then retail investors get excited and buy without doing their fundamental homework.

The uptrend feeds on itself. Until it doesn’t.

We have seen countless stock market bubbles over the past 20 years.

There was the dot.com bubble when money-losing tech stocks like Pets.com were artificially buoyed by pure hype.

We had the cannabis stock price bubble of 2020 and early 2021 hoping for federal legalization bringing big profits to money-losing newbies like Tilray and Canopy Growth.

There was the infamous meme bubble during the height of the pandemic that saw astronomical gains in GameStop, AMC, Bed Bath & Beyond and other fundamentally weak stocks seemingly overnight.

This year, artificial intelligence (AI) stocks have felt fizzy many times, especially when you single out the fundamentals of companies being hyped on trading desks, Twitter and in trading forums. discussion.

C3.ai came out last week and said it would lose around $68 million on an operational basis for the fiscal year ending April 30. Analysts expect the company to lose another $63 million in its new fiscal year.

C3.ai has never made a profit.

However, the title is up 160% this year. For this writer, it’s too bubbly for my panties.

At first glance, Nvidia checks a lot of bubble boxes:

  • A market capitalization of over $200 billion was gained in a single session simply due to a 2Q earnings outlook that was billions above estimates. Forgotten: Sales, operating profit and net profit all fell year over year.

  • Easy story to sell to novice investors. Here’s the pitch: Nvidia’s generative AI chips are being used by Microsoft-backed Meta and ChatGPT to change the world, so go buy Nvidia’s stock.

  • Nvidia shares continue to hit ever-higher valuation multiples, taking them to new all-time highs based on future potential, which is just that – unknown future potential. Consider this: Nvidia shares are now trading at a PE ratio of 112 times estimated earnings for the next 12 months. The broader stock market, as measured by the S&P 500, is trading at around 18.5x.

These are large numbers on a large stock of 2023 floors.

But unlike the bubbles discussed here, Nvidia’s rise is a bit different.

For one thing, Nvidia founder and CEO Jensen Huang has a strong execution record. Over the past six years, Nvidia has reported $40.3 billion in adjusted operating profits by my calculations. How did he do this? By being at the forefront of chip design for major industries such as gaming, automotive and data center.

Nvidia has done tangible things to accelerate the growth of very large companies, and has been paid handsomely to do so.

Huang has remained very measured as his business burst onto the scene, based on what people who know him have told me over the years. I love that Huang does no TV commercials, 10 interviews on results day and appears at 12 conferences a year. The guy stays focused on the execution and only comes out when he has something to share.

This is real leadership.

And that brings me to my last point.

Nvidia is proving it will be at the forefront of a real-life generative AI movement. You may laugh I bought the hype, but I talk to enough CFOs to know that they’re allocating mega-money to AI development…and a lot of that money is being spent on powerful Nvidia chips.

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

Characteristics of bubbles on Nvidia? Of course. Will the stock company return to Earth? Of course. But to say that Nvidia is another long-term stock market bust is probably off the mark.

“The AI ​​revolution is not hype because there will be massive winners like Microsoft, Nvidia, and Google, as well as clear losers on the AI ​​casualty list,” Dan told me. Wedbush Technical Analyst Ives via email.

All in a one-day investment analysis.

Brian Sozzi is the editor of Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Email brian.sozzi@yahoofinance.com

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