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Why the Nvidia boom isn’t a bubble

Here’s The Takeaway from today’s Morning Brief, which you can receive in your inbox every Monday through Friday at 6:30 AM ET, along with:

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

Well, boy, did you think wrong!

The question on my mind today is whether we are witnessing an old-fashioned stock price bubble in Nvidia.

I tend to say No.

But I’m throwing out a bunch of caveats for investors who should be wary of getting into (or even considering getting into) a stock that just gained more than $200 billion in market cap in a single trading session.

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

A stock price bubble can be loosely defined as a situation in which the price of a stock becomes completely detached from reality to the upside. This is often when a sexy investment thesis captivates Wall Street’s trading desks, driving stocks higher. Then retail investors get excited and buy without doing their fundamental homework.

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

We’ve seen countless bubbles in stock prices over the past 20 years.

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

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We’ve had the cannabis stock bubble of 2020 and early 2021 hoping that federal legalization will bring big profits to money-losing pot-up startups like Tilray and Canopy Growth.

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

Artificial intelligence (AI) stocks have felt fizzy many times this year, especially when you break down the fundamentals of the companies that are being hyped on trading desks, Twitter, and in chat rooms.

C3.ai came out last week saying 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 the new fiscal year.

C3.ai has never turned a profit.

Still, the stock is up 160% this year. That’s too fizzy for my pants for this writer.

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

  • Gained more than $200 billion in market cap in a single session simply because of a Q2 revenue forecast that was billions above estimates. Overlooked: sales, operating profit and net profit were down year over year.

  • Easy marketable story for early-stage 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 buy Nvidia’s stock.

  • Nvidia’s shares continue to reach higher and higher valuation multiples, pushing them to new records based on future potential, which is just that — unknown future potential. Consider this: Nvidia’s stock now trades at 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 about 18.5 times.

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These are large numbers on one large stock from 2023.

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

First, Nvidia founder and CEO Jensen Huang has a strong track record of execution. Over the past six years, Nvidia has pulled in $40.3 billion in adjusted operating profit by my calculation. How did it do this? By leading the way in chip design for major industries such as gaming, automotive and data centers.

Nvidia has made tangible things to accelerate the growth of really big companies, and been paid dearly for it.

Huang has remained very measured when his business came on the scene, based on what people who know him have told me over the years. I like that Huang is not busy with TV commercials, 10 earnings day interviews and 12 conferences a year. The man remains stubborn when performing and only comes out when he has something worth sharing.

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That is real leadership.

And that brings me to my last point.

Nvidia is proving it will be at the forefront of a real-life generative AI movement. You may giggle that I bought into the hype, but I talk to enough CFOs to know that they spend huge amounts of money on AI development… and a lot of that money is spent on powerful Nvidia chips.

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

Bubble features on Nvidia? Certainly. Will the stock company return to Earth? Certainly. But to say that Nvidia is another long-term stock crisis probably misses the point.

“The AI ​​revolution is not hype, because there will be huge winners, such as Microsoft, Nvidia and Google, as well as clear losers on the AI ​​roadkill list,” Wedbush technical analyst Dan Ives told me via email.

All in a one day investment analysis.

Brian Sozzi is the editor-in-chief of Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and further LinkedIn. Email to [email protected]

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