Nvidia’s surge stokes talk of a bubble
Nvidia’s meteoric surge has helped push the stock market to record highs. It also has some on Wall Street saying the “B word.”
Rising enthusiasm for artificial-intelligence technology has made Nvidia’s chips a musthave product, and in turn, transformed Nvidia into the market’s hottest stock.
The stock has risen more than sevenfold since Oct. 14, 2022, and Nvidia is now the third-most-valuable U.S. company, with a market value above $2 trillion. The chip maker added nearly $280 billion in value in just two trading sessions after reporting blowout fourth-quarter results on Feb. 21. It took just 180 trading days for Nvidia’s value to rise to $2 trillion from $1 trillion; it took more than 500 trading days for both Apple and Microsoft to reach that milestone.
In the process, Nvidia has become one of the most popular stocks among everyday investors. Of the 59 Wall Street analysts who cover the stock, 54 rate shares a buy or outperform, according to FactSet.
Other chip stocks have come along for the ride. The PHLX Semiconductor Index has climbed 18% this year. Advanced Micro Devices has gained 37%, while Lam Research and Broadcom have each risen 25%.
The Nasdaq Composite on Thursday set its first new high since 2021, while the S&P 500 has already notched 15 record closes in 2024. Both indexes have risen in 16 of the past 18 weeks, bringing their year-todate advances to 8.4% and 7.7%.
The surge has some Wall Street professionals wondering whether the enthusiasm is morphing into a classic stock bubble.
“We’re getting a lot of calls from clients about AI stocks,” said Emerson Ham III, senior partner at Sound View Wealth Advisors, who has recommended chip stocks for his clients since 2018. “Whenever anything goes too well, I get nervous. We’re having conversations with clients about taking some cream off the top.”
Others were more blunt: “The current AI bubble is bigger than the 1990s tech bubble,” wrote Torsten Slok, chief economist at Apollo, in a note to clients last week. Bulls and bears on the stock agree on one thing: Nvidia’s rise is accompanied by blowout profits. That sets the enthusiasm over artificial intelligence apart from speculative manias of the recent past, such as cannabis or blockchain stocks.
In the most recent quarter, Nvidia earned a profit of $12.29 billion, up from $680 million in the three months that ended in October 2022. Gross profit margins rose to nearly 76%, from 53.6% over that same period.
As a result, the stock has actually become cheaper by some measures: Nvidia trades at 32 times its expected earnings over the next 12 months, according to FactSet. The twoyear average is 38 times. The S&P 500’s multiple is 20.6.
“We can’t call it a speculative mania because it trades at lower P/E than it did a year ago. Nvidia is talking the talk and walking the walk,” said Joseph Zappia, principal and co-chief investment officer at LVW Advisors.
“This is all happening in the context of a bull market. Investors in general are feeling good because prices go up,” he added. Others question whether Nvidia can maintain its torrid pace of growth. Analysts polled by FactSet expect $107 billion in revenue for the fiscal year that ends in January, up from $60.9 billion last year.
They worry that demand for chips from large tech companies might not hold up in the years ahead. Nvidia said one buyer accounted for nearly a fifth of sales last year. Others fret that fresh competition will emerge from other chip makers, resulting in fewer sales or lower margins.
“I think people are forgetting this is a boom-and-bust company,” said Fred Hickey, editor of the High-Tech Strategist. He is betting against Nvidia through long-dated put options purchased after last month’s earnings report, he said. Nvidia shares have fallen by 50% or more on 14 separate occasions since the company went public in 1999, according to Dow Jones Market Data. Most recently, the stock dropped 56% over a two-month period in 2018 and again over an eight-month period that ended in 2022.
“Eventually there is a cap on earnings. They’re not gonna double every year, it just doesn’t work that way,” said Ham of Sound View.
Besides profits, bulls pointed to another key factor working in Nvidia’s favour: the absence of new AI-themed initial public offerings.
“I was there for Webvan, I was there for Pets.com,” said Michael Sansoterra, chief investment officer at Silvant Capital Management, which owns Nvidia shares. “And there’s just nothing like that out there today,” he said, referring to two disastrous IPOs in the dot-com era.
Few are lining up to bet against the company, despite the apprehension. Just over 1% of publicly available shares are sold short, according to Nasdaq data.