Has Nvidia gone up too high? Someone starts talking about a bubble

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Growing enthusiasm for Artificial Intelligence (AI) technology has transformed computer chips Nvidia into an indispensable product, in turn making the company itself the hottest stock on the market. Its stock value has grown more than sevenfold since October 14, 2022, placing Nvidia as the third largest US company by market value, with a capitalization exceeding 2 trillion dollars.

After outstanding fourth-quarter results reported on February 21, the chipmaker added almost 280 billion of value in just two trading days. In just 180 trading days, Nvidia managed to double its value from 1,000 billion to 2,000 billion dollars, a remarkable achievement faster compared to the over 500 days needed to Apple And Microsoft to reach a similar goal.

Consequentially, Nvidia it has become one of the most popular investments among common operators. Of the 59 Wall Street analysts tracking the stock, 54 rate it as «buy» or “outperform”, according to FactSet data.

At the same time, other stocks in the chip sector also benefited from this momentum. The index Phlx Semiconductor it is up 18% this year. Advanced Micro Devices recorded an increase of 37%, while LamResearch And Broadcom both saw an increase of 25%.

Nvidia drives new records on the Nasdaq and S&P500

On Thursday, February 29, the Nasdaq Composite scored its first maximum from 2021while the S&P 500 has already posted 15 record closes in 2024. Both indexes have seen increases in 16 of the past 18 weeks, bringing their year-to-date gains to 8.4% and 7.7%, respectively.

This surge has sparked perplexity among some Wall Street experts, who wonder whether the excitement could lead to a classic bubble equity. “We are receiving numerous calls from our clients regarding AI-related stocks,” said Emerson Ham III, senior partner at Sound View Wealth Advisors, who has been recommending chip stocks to his clients since 2018. “Whenever things are going particularly well, I feel a certain amount of anxiety. We are currently discussing with customers the possibility of making some profits.”

Others were more direct: «The current bubble linked to Artificial Intelligence is bigger than the technological bubble of the 90’sTorsten Slok, Apollo’s chief economist, wrote in a note to clients last week.

Bubble? The profits are certainly exceptional

However, both bulls and bears of the stock agree on one thing: the rise of Nvidia is generating exceptional profits. This differentiates the enthusiasm for AI from the speculative mania of the recent past, as in the case of cannabis or blockchain stocks.

In the last quarter, Nvidia reported a profit of 12.29 billion dollarsup from $680 million reported in the prior three months ending October 2022. Gross profit margins rose to nearly 76%, up from 53.6% in the same period.

As a result, by some measurements, the title actually became cheaper: Nvidia it trades at 32 times expected earnings over the next 12 months, according to FactSet. The two-year average is 38x, while the S&P 500 multiple is 20.6.

«We cannot define this situation as a speculative mania because its relationship price/earnings (P/E) is lower than a year ago. Nvidia he is putting into practice what he promised,” he declared Joseph Zappia, director and co-Chief Investment Officer at Lvw Advisors. «All of this is occurring within a bull market. Investors in general remain positive as prices continue to rise,” he added.

But will it continue to grow at the same rate?

However, some raise doubts about the ability to Nvidia to sustain its rapid growth rate. Analysts surveyed by FactSet expect a sales by $107 billion for the fiscal year ending in January, up from $60.9 billion last year.

Furthermore, concerns are emerging regarding the sustainability of demand of chips by big tech companies in the coming years. Nvidia revealed that a single shopper contributed to nearly a fifth of last year’s sales. Others also fear the appearance of new competitors in the chip industry, which could impact sales or margins.

“I think a lot of people are overlooking the fact that this is a company that goes up and down,” he said Fred Hickeyeditor of the High-Tech Strategist, adding that he bet against it Nvidia through put options long term, bought after last month’s earnings report. The actions of Nvidia they have declined 50% or more on 14 separate occasions since going public in 1999, according to Dow Jones Market data. In particular, the title has suffered a drop of 56% in a two-month period in 2018, and again in an eight-month period ending in 2022. “Sooner or later, there will be a cap on earnings. They’re not going to double every year, it just doesn’t work that way,” said Sound View’s Ham.

No new IPOs in the AI ​​sector are in sight

In addition to profits, supporters have pointed to another key factor in favor of Nvidia: The absence of new AI-focused initial public offerings (IPOs). “I lived through the era of Webvan and Pets.com,” he said Michael SansoterraChief Investment Officer at Silvant Capital Management, which owns shares of Nvidia. “And today the situation is completely different,” she added, referring to two disastrous IPOs in the dot-com era.

Few are betting against the company, despite the concerns. According to Nasdaq data, just over 1% of publicly available shares are sold at discovery.


(Translated from the original version by Milano Finanza Editorial Staff)

MF+MIFI + The Wall Street Journal

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