Unlike CISCO ca 1999, NVDA makes insanely expensive, insanely scarce chips, that every major company in the world will be fighting over for the foreseeable future. The promise of AI (even if it fails) is going to have infinite money chasing it. Many firms will see the implementation of their own proprietary LLMs trained on their data as existentially vital. In addition to making the best chips, CUDA locks customers into NVDA products. I just don’t see how NVDA’s valuation is stretched when we consider these facts.
I suppose the issue is simply that valuation and narrative always move together. Nobody saw the flood of competition that CSCO would face either. Or the inability of Zoom to make money. Or that Citigroup would go from most respected bank in the world to a laughingstock. At 37X sales, the future has to be more than perfect. For small companies, high price-to-sales does not matter as much because they can grow fast enough. For a 1 trillion dollar company to grow into a 37X sales valuation is another story.
It is difficult, though not completely impossible for NVDA to grow into a 37X sales valuation. It can definitely happen but a story or narrative like this is a necessary feature of every stock like this. So you need to do the numbers and see if the growth is actually possible. Simply defining a company as world-changing or monopolistic is not enough because every bubble stock fits that description and almost none are good investments. Generally, if a story is on the front of every magazine, it's unlikely to have a positive expected value because markets are fueled by greed at that point, not conservatism or fear.
Here is how Scott McNealy explained it... This was with SUNW at 10X sales. NVDA is 37X...
"At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?"— Scott McNealy, Business Week, 2002
As a trader I know you’ve seen this play out before and every time people say “But this time it’s different.” I think we’re in a fundamentally different phase of AI than the peak of a bubble, however. I think AI is where the internet was in 96 or 97. 10% of Americans have used ChatGPT. Of them almost none have used GPT4. Skepticism of AI is everywhere.
At present AI is made of code and NVDA chips. NVDA’s competitive advantage is huge and it will take years for a real competitor to emerge. And this isn’t like running software on a computer, this is more akin to bitcoin mining - you win if you have the most processing power, so the hunger for chips is essentially infinite.
We could be looking at 5 years where basically every penny that every data-driven company can scrounge up is going straight into NVDA’s pocket. Paradigm shifts do happen, and this *could* be one of them.
NVDA’s valuation bakes in some insane growth, but both its history and its prospects are far more supportive of that growth than any bubble stock I can think of.
Thanks for the insightful responses. There’s nothing better than an intelligently argued opposing view. My main counterpoint to the cold hard numbers valuation argument would be TSLA. I don’t have good graphing capabilities but I’d be interested in analyzing their comparative historical growth and valuation. TSLA seems to have grown into its valuation pretty credibly. Everything gets ahead of itself, but NVDA keeps ripping faces off with their growth.
Thanks man .. only other thingi ‘d say is TSLA grew from small market cap, up to 1T
NVDA already 1T market cap .. so law of large numbers kicks in potentially
Good debate thanks -- I think it’s possible stock is worth owning but would imagine many better options out there as it's priced for perfection but still could achieve perfection !
Trading is about making money not being the smartest man in the room. Chapeau BD
Thanks man
As usual, my favourite piece of the week. Overall, not just on substack ;-)
Nice
PS: rock video only available on US youtube it seems
Unlike CISCO ca 1999, NVDA makes insanely expensive, insanely scarce chips, that every major company in the world will be fighting over for the foreseeable future. The promise of AI (even if it fails) is going to have infinite money chasing it. Many firms will see the implementation of their own proprietary LLMs trained on their data as existentially vital. In addition to making the best chips, CUDA locks customers into NVDA products. I just don’t see how NVDA’s valuation is stretched when we consider these facts.
I suppose the issue is simply that valuation and narrative always move together. Nobody saw the flood of competition that CSCO would face either. Or the inability of Zoom to make money. Or that Citigroup would go from most respected bank in the world to a laughingstock. At 37X sales, the future has to be more than perfect. For small companies, high price-to-sales does not matter as much because they can grow fast enough. For a 1 trillion dollar company to grow into a 37X sales valuation is another story.
It is difficult, though not completely impossible for NVDA to grow into a 37X sales valuation. It can definitely happen but a story or narrative like this is a necessary feature of every stock like this. So you need to do the numbers and see if the growth is actually possible. Simply defining a company as world-changing or monopolistic is not enough because every bubble stock fits that description and almost none are good investments. Generally, if a story is on the front of every magazine, it's unlikely to have a positive expected value because markets are fueled by greed at that point, not conservatism or fear.
Here is how Scott McNealy explained it... This was with SUNW at 10X sales. NVDA is 37X...
"At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?"— Scott McNealy, Business Week, 2002
As a trader I know you’ve seen this play out before and every time people say “But this time it’s different.” I think we’re in a fundamentally different phase of AI than the peak of a bubble, however. I think AI is where the internet was in 96 or 97. 10% of Americans have used ChatGPT. Of them almost none have used GPT4. Skepticism of AI is everywhere.
At present AI is made of code and NVDA chips. NVDA’s competitive advantage is huge and it will take years for a real competitor to emerge. And this isn’t like running software on a computer, this is more akin to bitcoin mining - you win if you have the most processing power, so the hunger for chips is essentially infinite.
We could be looking at 5 years where basically every penny that every data-driven company can scrounge up is going straight into NVDA’s pocket. Paradigm shifts do happen, and this *could* be one of them.
NVDA’s valuation bakes in some insane growth, but both its history and its prospects are far more supportive of that growth than any bubble stock I can think of.
I am not certain but history is not on your side is all
https://twitter.com/aspentrading10/status/1667520259530674178?s=46&t=Z-boW5UHRWKGTmYteOnSkA
Thanks for the insightful responses. There’s nothing better than an intelligently argued opposing view. My main counterpoint to the cold hard numbers valuation argument would be TSLA. I don’t have good graphing capabilities but I’d be interested in analyzing their comparative historical growth and valuation. TSLA seems to have grown into its valuation pretty credibly. Everything gets ahead of itself, but NVDA keeps ripping faces off with their growth.
Thanks man .. only other thingi ‘d say is TSLA grew from small market cap, up to 1T
NVDA already 1T market cap .. so law of large numbers kicks in potentially
Good debate thanks -- I think it’s possible stock is worth owning but would imagine many better options out there as it's priced for perfection but still could achieve perfection !
Get yourself to a Billy Strings concert and look for TG and me there. ;)
looking at tickets for hartford right now !
Happy to see you are back with even better content. I like the format!
thx vm !
Great work this week, Brent - thank you!
Billy rules.👊🏽
Awesome
Thanks Bruce