Is a great business worth any price? Nvidia investors finally seem to be asking themselves that question.
The chip maker powering the artificial-intelligence revolution blew past $3 trillion in market capitalization earlier this month barely three months after passing $2 trillion. It even became the world’s most valuable company earlier this week, briefly surpassing Microsoft and Apple. That seems to have given investors some pause; Nvidia’s share price has slipped nearly 7% since trading resumed after the Juneteenth holiday.
Still, with a value of a little over $3.1 trillion as of Friday’s close, Nvidia is hardly cheap. That is merely 2% below that of Apple, a company with more than 2½ times Nvidia’s trailing 12-month free cash flow. The stock is also now at nearly 45 times projected earnings for the next four quarters. That is 11% above its five-year average multiple and about 35% higher than what the stock was fetching when the company’s market value first crossed the $2 trillion threshold in March.
Nvidia’s sharp rise — and big gains made by stocks such as Dell, Super Micro and Broadcom that are also seen as AI enablers — has spawned inevitable comparisons to the dot-com bubble that burst nearly a quarter of century ago. There are some parallels: The early days of the Internet favored companies selling the necessary hardware to get homes and businesses online. Cisco, IBM, Lucent Technologies and Intel were four of the 10 most valuable companies on the market by the end of 1999, according to data from S&P Global Market Intelligence. Cisco overtook Microsoft to become the most valuable public company about four months later.
Cisco’s stock price is about 40% below that level now, adjusted for splits. That seems like a cautionary tale for Nvidia’s shareholders. But there are also some important differences to consider. Cisco swelled to a much frothier multiple of 131 times forward earnings at its peak in March 2000, according to FactSet data. And that was on less impressive financial performance, as the company’s revenue grew 55% in the fiscal year that ended that July with an operating margin of 17%, down from 24% the year before, according to data from S&P Global Market Intelligence. Nvidia’s trailing 12-month revenue at the end of the April quarter was more than triple that of the same period last year, while its operating margin has more than doubled in that time to 60%.
Cisco’s business also cratered the following year as orders from financially shaky customers that had been propping up its bookings quickly vanished. It actually lost money in the 2001 fiscal year after earning $3.2 billion the year before.
“This may be the fastest deceleration any company of our size has ever experienced,” Cisco’s then chief executive, John Chambers, said in the company’s earnings release in May of that year.
Such a drastic turn is highly unlikely for Nvidia. Deep-pocketed tech giants such as Microsoft, Google and Amazon that operate extensive cloud computing networks account for more than 40% of the company’s data-center sales, and they all have clearly signaled plans to spend even more in the coming year.
“Unlike the ‘dot-com boom’ that was funded by risky debt-taking, genAI deployment is a mission-critical race between some of the best-funded (cloud) customers,” Vivek Arya of BofA Securities wrote in a note to clients this week.
Nvidia will also have more software revenue coming into its mix as the growing base of its AI systems will necessitate more use of its software tools by developers.
That doesn’t necessarily make Nvidia’s shares safe at their current level, though. The stock has seen a big influx of individual investors since the company’s latest financial results last month. Daily retail inflow has averaged nearly $141 million since the earnings compared with a daily average of about $39 million during the month prior, according to Vanda Research.
Sell-side analysts are also getting rather exuberant. Several have pushed up their price targets since the stock’s June 10 split. And at least four of those targets are now at $160 and higher, which would put Nvidia’s market capitalization near $4 trillion at its current share count. Nvidia may be the top gun of AI, but investors should be careful not to write checks the stock can’t cash.
