Nvidia's Surge Stirs 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 has made Nvidia's chips a must-have product, and transformed Nvidia into the market's hottest stock. The surge has some Wall Street professionals wondering whether AI mania is morphing into a classic stock bubble.

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 two trading sessions after reporting blowout fourth-quarter results on Feb. 21. It took 180 trading days for Nvidia's value to rise to $2 trillion from $1 trillion; it took more than 500 trading days for Apple and Microsoft to reach that milestone.

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 climbed 18% this year. Advanced Micro Devices gained 37%, while Lam Research and Broadcom each rose 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-to-date advances to 8.4% and 7.7%.

"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 AI apart from speculative manias of the recent past, such as 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 become cheaper by some measures: Nvidia trades at 32 times its expected earnings over the next 12 months, according to FactSet. The two-year price-to-earnings 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.

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 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 50% or more on 14 occasions since it went public in 1999, according to Dow Jones Market Data. Most recently, the stock fell 56% over a two-month period in 2018 and again over an eight-month period ending in 2022." [1]

Nobody on Wall Street is saying , that this time it is different, since we are living in revolution of economy caused by AI application. These people do not care about economy. They care about their own money. What fools...

1. Nvidia's Surge Stirs Talk of A Bubble. Grant, Charley.  Wall Street Journal, Eastern edition; New York, N.Y.. 04 Mar 2024: B.1.