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· Company makes history as it enters the $1T MC club
· Growth expectations are stretching valuations too much
· Investors chasing momentum should be careful
Nvidia’s market cap (MC) went pretty much vertical from $279 billion in
October of last year to over $1 trillion this week, as
stronger-than-expected sales, driven by AI mania, propelled the stock’s
market price to an all-time high of over $400 a share, leaving many market
participants wondering if its explosive growth will continue — or if the AI
craze is merely temporary?
The company’s MC breached the $1 trillion mark this week, joining the elite
$1 trillion MC valuation club with only five other names on planet Earth
(or at least in the public valuation space) with the likes of 4 tech
juggernauts (Apple, Microsoft, Alphabet, and Amazon) and 1 Oil Behemoth
(Aramco). Thus, becoming the first-ever chipmaker to reach that incredible
milestone.
Nvidia’s (trailing twelve months) revenues at $25.88 billion are only a
fraction compared to the other tech giants such as Apple, Microsoft,
Alphabet and Amazon, all of which have top-line north of $200 billion.
Hence, why are investors pulling into it in the first place – the answer is Nvidia’s enormous growth potential generated by the AI euphoria.
Tsunami of new orders
The company stock price is flying on the back of massive demand from AI service providers selling graphics chips that powered everything from the video game boom to the rise of cryptocurrency and the industry’s big bet on the metaverse as Q2’2023 sales are projected to topple $11B compared to analysts (polled by Refinitiv) expectations of $7.15B!
“…we’re seeing incredible orders to retool the world’s data centers, ” said Jensen Huang, Co-Founder & CEO, on the latest conference call.
And that is only the beginning. Analysts, as per Tradingview figures,
expect Nvidia’s annual revenue to skyrocket or effectively triple in the
next few years to a mind-blowing $90 billion by FY 2026, which translates
to an eye-popping growth rate of 231% compared to its latest FY 2022 result
of $27 billion.
AI hype or the real deal?
Pulling out, the Nvidia story as stock is just a series of waves of investor euphoria that it has ridden, from graphics chips to data centers to crypto to AI. You can see below how its price-earnings-to-growth ratio has soared and fallen over the last decade.
The latest narrative that drives the latest monstrous rally is about AI. What investors are betting on is that Nvidia will make enormous profits from the chips used to power these AI systems. No one is betting against the incredible momentum as the short interest is only 1,17%. And rightfully so, Nvidia’s breathtaking triple digits return of over 174% YTD is by-far the highest in the S&P 500 as the stock added over $280bn in market cap over the last few days.
Undoubtedly Nvidia’s processors have been the gold standard for training AI models such as Google’s Bart and OpenAI’s ChatGPT.
However, valuations are stretched, and we might see some meaningful pullback. Despite the current “AI” bubble being considered a “baby bubble” compared to previous ones, irrational exuberance times fuelled speculative periods that repeatedly recurred over the last 45 years as investors’ imaginations outpaced the realities of the underlying fundamentals.
Hence, investors must be careful not to chase the stock as the fear of missing out (FOMO) is a dangerous emotion that traders often flirt with and is one of the critical ingredients that inflates an asset bubble.
Priced to perfection?
This insatiable hunger for returns has distorted the picture for Nvidia.
The Stock trades at a jaw-dropping 30x sales and a hair-raising 182x
earnings, despite having a fraction of the sales of the big ballers such as
Apple, Amazon, and Microsoft, as mentioned earlier. The big emphasis is
placed on the quantity of sales expected to jump 3x by 2026 to compress
those out of this planet multiples to more meaningful historical levels.
Investors should ask themselves, what if the company cannot meet those
expectations? Well, then, the stock will have to adjust to the downside.
It’s worth pointing out that the only time when valuations were at such
incredibly high was during the dot.com bubble, and the stock did not live up
to them. Hence, the subsequent periods were terrible for investors as
“everyone had to own” the stock times proved awful for the company’s
returns.
Nvidia is not only richly valued on a historical but also on a relative basis. It is the most expensive stock in the semiconductor space in the US, with a mind-blowing 12-month forward P/E ratio of over 50!
Bottom line:
The stock seems to be priced to perfection as the incredible growth expectations are already embedded in the company’s share price, which does not mean the current momentum cannot continue.
“Markets can remain irrational longer than you can remain solvent” – John Keynes.
Investors might consider shorting the stock using our ETPs -1x NVIDIA and -3x Nvidia .
Alternatively, those who want to chase the momentum could long it with our 2x NVIDIA and 3x NVIDIA .
Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.
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If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.
If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.
Risk Warnings
The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.
This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.
Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.
This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.
United States Visitors
The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.
Persons accessing this website in the European Economic Area
Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).
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Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.
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