Why Nvidia’s boom isn’t a bubble

This is The Takeaway from today’s Morning Brief, which you can receive in your inbox every Monday to Friday by 6:30 a.m. ET along with:

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

Well, boy did you think wrong!

The question on my mind today is whether we are witnessing a good ole’ fashioned stock price bubble in Nvidia.

I am inclined to say no.

But I am tossing onto the field a ton of caveats for investors who should be careful getting into a stock (or even considering getting into it) that just gained $200 billion plus in market cap in a single trading session.

For perspective, McDonald’s ENTIRE market cap is $209 billion!

A stock price bubble could be loosely defined as a situation when the price of a stock completely detaches from reality to the upside. This is often when a sexy investment thesis captivates Wall Street trading desks, sending the stock higher. Then retail investors get excited and buy without doing their fundamental homework.

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

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

There was the dot.com bubble when money-losing tech stocks such as Pets.com were artificially propped up on pure hype.

We’ve had the cannabis stock price bubble of 2020 and early 2021 on hopes of federal legalization bringing big profits to money-losing pot upstarts like Tilray and Canopy Growth.

There was the famous meme stock bubble at height of the pandemic that saw astronomic gains in GameStop, AMC, Bed Bath & Beyond and other fundamentally weak stocks, seemingly overnight.

Artificial intelligence (AI) stocks this year have felt bubblicious many times, especially when you pick apart the fundamentals of the companies being hyped on trading desks, Twitter, and in chat rooms.

Story continues

C3.ai came out last week and said it will lose about $68 million on an operating basis for the fiscal year ended April 30. Analysts expect the company to lose another $63 million for its new fiscal year.

C3.ai has never turned a profit.

Yet, the stock is up 160% this year. To this writer, that’s too bubbly for my britches.

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

• $200 billion-plus market cap gained in a single session simply because of a 2Q revenue outlook that was billions above estimates. Overlooked: sales, operating profits and net profits were all down year on year.

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

• Nvidia’s stock continues to fetch ever higher valuation multiples, taking them to new records based on future potential, which is just that — unknown future potential. Consider this: Nvidia’s stock now trades at on a PE ratio of 112 times estimated earnings for the next 12-months. The broader stock market as measured by the S&P 500 trades at 18.5 times or so.

Those are large numbers on one large 2023 story stock.

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

For one, Nvidia founder and CEO Jensen Huang has a strong track record of execution. Over the last six years, Nvidia has hauled in $40.3 billion in adjusted operating profits by my math. How has it done this? By being on the leading edge of chip design for big sectors such as gaming, autos, and data centers.

Nvidia has made tangible stuff to accelerate the growth of really large companies, and has gotten handsomely paid to do so.

Huang has stayed very measured as his company has burst onto the scene, based on what people who know him have told me through the years. I like that Huang isn’t out there doing TV commercials, 10 earnings day interviews and appearing at 12 conferences a year. The guy remains head down on executing and only comes out when he has something worth sharing.

That’s real leadership.

And that brings me to my final point.

Nvidia is proving it will be on the leading edge of a real life generative AI movement. You may giggle that I have bought the hype, but I talk to enough CFOs to know they are allocating mega money to AI development…. and a lot of that money is being spent on powerful Nvidia chips.

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

Bubble characteristics on Nvidia? Sure. Will the stock company back to Earth? Sure. But to say Nvidia is another long-term stock bust is probably missing the point.

“The AI Revolution is not hype as there will be massive winners such as 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 day’s investing analysis.

Brian Sozzi is Yahoo Finance’s Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Email [email protected]

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