Sirwin
Sirwin

Is Nvidia a Bubble and Will It Burst?


Is Nvidia a bubble? Is the rise of stocks in artificial intelligence technologies a bubble? Are American stocks generally a bubble? If you ask memorizers around the world, this is generally the case. By the way, they may also be right. It is very difficult to predict what stock prices will do. But instead of immediately labeling something as a bubble and losing crazy money by shorting it, I think it would be useful to understand what is going on behind the scenes and do a little more analysis on this issue, whether we are really facing a bubble or a significant upward step. Of course I could be wrong. But I believe we are not in the bubble yet. I think we still have a ways to go. Of course, there may be corrections, but we still have a ways to go. I will tell you all about Nvidia, artificial intelligence stocks and stock market indices in general today. I think you will be interested.

Let's first remember what happened to Nvidia. He brought an extraordinary balance sheet on Wednesday. He offered extraordinary predictions about the future. When we looked at the details of the balance sheet, item by item, in which areas it was growing, he said positive things that surprised us, and as a result, the stock went up. The company's value increased by 247 billion dollars in a single day. Even more interestingly, the total value of AMD, which is shown as Nvidia's closest rival, is 246 billion dollars. In other words, Nvidia added as much value as its closest rival in a single day and has now reached over 1.9 trillion dollars. It is the most valuable company in the world after Microsoft and Apple. Many people believe that Nvidia will become the most valuable company in the world within this year. Frankly, I call this a high probability. Of course, such sudden rises always reveal bubble myths, and yes, as I said again, anything can happen to stock prices. But is it really a balloon? Let's take a look at it now.

For example, one of the most favorite graphs of memorizers who call bubbles is the rise of Cisco in the 1900s. They say that Nvidia is also rising like him. In this case, Nvidia's fate would be the same. Now, it would be beneficial for us to look at the fundamentals of the company rather than the charts here. What was Cisco selling? When the internet was spreading very quickly, routers, hubs and switches were sold and once you bought them, you never changed them again. They also have such features. So it is not a very renewed product. Think about it, if you have an internet switch at home, it has not been changed for a long time. So the market was actually finite. When the limit was reached in this finite market, and when other countries began to produce similar products such as Air Ties, it was predicted that profit margins would decline, sales growth would slow, and the stock went down sharply.

When we look at Nvidia, yes Nvidia is also a hardware manufacturer. It produces microchips, GPUs, graphic processing units, and although these are in incredible demand right now, could the demand for them end one day? Maybe it will end, but I don't think so. Because the efficiency impact that the artificial intelligence revolution will bring to the world is much greater. I think many more companies will invest in AI microchips for a longer period of time. I think that Nvidia is a much more innovative company than Cisco and therefore will equip the market with new products and services in the coming period. I will give clues about this a little later, and most importantly, I think there is something wrong with the chart.

The graph shows what has happened since 1996. Now let's go back to 1990, not 1996, and Cisco. Cisco traded around $100 in the early 1990s. Towards the end of the 1990s, when the internet revolution took place, the price of Cisco reached 11000 dollars and everyone was done with Cisco. Because he also makes a harsh correction there, and looking at this correction, many people believe that Cisco has come to the end of the road. However, Cisco continues to rise from there and reaches $103000. So, if we pulled the chart a little earlier than 1997-98, someone would probably say there was a big bubble here too. But Cisco managed to add another 9-10 layers to this balloon.

Well, in the Cisco - Nvidia comparison, when you take the starting points of Nvidia and Cisco as $ 100, Nvidia is currently at $ 14612. You know, this bubble about Cisco ends here. There is a place that is said to go no further, right there. From there, remember Cisco, it increased from $ 1500 to $ 103000. So I think both the technology they are in and the total accessible market are very different. I see Nvidia as having a much better advantage in this regard. Moreover, even if this is a bubble, the bubble may still have a long way to go. In fact, it seems like we are perhaps only at the first steps of the bubble. Another example of bubbles comes from the Japanese stock market.

The Japanese Stock Exchange rose incredibly rapidly from 1950 to 1973. By 1972, the average price earnings ratio of Japanese stocks was in the 40s. If I'm not mistaken, we are currently at 16-17 in Nasdaq and it is said that this is a terrible number and the Japanese stock market will now collapse. Indeed, the Japanese Stock Exchange is correcting sharply from there and analysts are 100% convinced that they are right. Then the correction is finished. The bubble begins to inflate again, and by the 1990s, the average price gain of the Japanese stock market reached 100x, a growth of almost 2.5 times. In other words, it is impossible to predict where the balloons begin and end. It can jump up again from where we thought it was over. That's why I find statements such as "this is a balloon", "that is a balloon", "I looked at this graph" completely empty. What we really need to look at is whether the company deserves this value or not. If he deserves it, on what basis does he deserve it? If he doesn't deserve it, on what basis does he not deserve it?

Another interesting comparison between Cisco and Nvidia, I found this on Twitter. But I can't remember the owner of the Twitter account. I'm sorry, that friend. The company's value increased by 370% during the period that accounted for the start of the internet revolution and Cisco reaching its peak. But don't forget that the company existed before and the price gain here reached 200. Everything accelerated with the beginning of the artificial intelligence revolution in Nvidia, that is, with the launch of chat gpt in 2023. When we look from there, the increase in the stock is around 124%. The price to earnings ratio was currently 65.80. Forward price-earnings are even well below that. When we look at this, it shows that the Nvidia - Cisco comparison does not make much sense, and even on the graphics, Nvidia has a long way to go.

But I always say that what is important is not the graphics, but what the company does and how its figures change. Here we go to Seeking Alpha again. The numbers are incredible, the increase in turnover is 265% compared to the same quarter a year ago, the increase in gross profit is 338% compared to the same quarter of the previous year, the increase in main operating profit is 984% compared to the same quarter of the previous year. That is, roughly 10 times more. The increase in net profitability compared to a year ago is 768%. Once we look at the basic figures from here, we see that what we encounter is horror. I've never encountered anything like this before. Let's look at absolute numbers. You will understand better that I want to try. While there was a turnover of 18 billion dollars a quarter ago, there is now a turnover of 22 billion dollars. While the turnover in the same quarter last year was 6 billion dollars, this year it is 22 billion dollars. Gross profit is 16 billion 791 million. 13,400 in the previous quarter, 4,648 in the same quarter a year ago, let's fast forward to net profit 12,285, 9,245 in the previous quarter. 2.43 in the same quarter of the previous year.

So now how can I be surprised that the value of this company is increasing rapidly? For example, if we look only in terms of net profit, if there is an increase of 768% compared to a year ago, it is because it does not issue many new shares and even buys back its shares. Nvidia also repurchased around $9 billion worth of stock this quarter. In other words, since there are fewer shares, earnings per share have increased faster. In this case, it seems perfectly normal that the company's value has already doubled by eight to nine. The truth is, it hasn't increased that much. Well, the company already reported earnings per share of $5.16. They beat the very high Wall Street expectation by 52 cents. It was $4.93 by GAAP standard. They exceeded Wall Street expectations, which were also very high, by 71 cents. Some may remember that I said that the company needs to report around $22 billion in order to maintain its stock value. Wall Street expectation was actually 20.5 billion, and it was exceeded by around 1.5 billion dollars.

When we look at it from here, is the company expensive? An interesting issue is that it actually gives F to the valuation seeking Alpha. However, when we look at the details, the issue that interests me most is PEG GAAP, that is, the company's stock price divided by earnings divided by growth. When we look at the growth, it seems to be 0.11 here, compared to the average of the last 12 months. This is 90% below the industry average. When we look forward, it appears to be 0.92. The industry average is 2.06, which is well below this. So these two ratios are A and A - but the situation is not so bright in the other ratios. Especially in terms of price divided by sales, it seems to be well above the industry average. Again, price divided by book value appears to be well above the industry average.

Now, let's evaluate what I said with some clear graphics. For this, when you go to the platform called mainstreetdata.com, the tremendous growth in turnover, the tremendous growth in net profit, the growth in different segments, we will dwell on this a little more. There are some very serious things there. Cash flow growth has slowed slightly in this last quarter. The extraordinary growth in gross profit, the extraordinary growth in operating decisions, everything is extraordinary, but let's look at the valuation side. That's the main issue, when we look at the valuation side, we see that the company's stock price is rising rapidly. But in fact the price earnings ratio is going downwards. At one point it reached 149. We are currently at 53. So if we were to go back here, we have a chance of a threefold increase.

When we look at the 10-year average, we have had price gains somewhere around the 10-year average and generally above today, starting from 2018, for a long time. This doesn't guarantee that the company will go up, but it does show that Nvidia is relatively inexpensive based on its history, and there isn't much of a bubble. The stock is exuberant as the company's performance, profit and sales have increased. Of course, expectations about the future are also very important here. Both the CEO said that we will grow a lot in the future, and the recent transformations in technology clearly show us that there is a greater need for artificial intelligence chips. Again, I said the company is a bit expensive when divided by price. Again, it is not much above average.

When we look at price divided by cash flow, we are actually below the average there. At least if we look at the last 2-3 years, we are still somewhere around the average when we extend the maturity a little. So yes, Nvidia has never been a cheap company. American technology companies' price-earnings ratios are always high, but there doesn't seem to be a nightmare here. Because this place tells us that even when we compare it with the company's history, we see that it is not too expensive. Moreover, the company's performance seems to be much higher than its competitors in the category, which we praise Magnificent 7. Earnings per share growth reached 130%.

There is no one approaching from January 1, 2022 to February 21. The closest one is Amazon with 52%, Tesla with 8%, Meta with 42%, and as you know, we can't stop praising Meta. Google is 20%, Microsoft is 28%, Apple is 15%, and the S&P 500 average is 12%. In other words, it has a rapidly growing profitability per share, well above the market. On the other hand, the company's multiple growth, that is, price divided earnings growth, is well below the average. Because price earnings are actually going backwards. It looks like minus 102%. There are people who perform much better than him. Tesla isn't doing so well either. Amazon is also cheaper here.

It's not just numbers that we need to look at a company's banjo period. CEOs' statements, details based on product groups. There are things here that fascinate me. Spear Invest summarized this very well, it says that it increased its turnover expectation for the first quarter of 2024 to 24 billion. This is 7% above Wall Street expectations. 9% increase compared to the previous environment. So big number after big number, and we know that Nvidia generally exceeds these targets. That's why I think it could reach 25 - 26 billion dollars in the first quarter. So the company still continues to grow. Data Center largest business increased by 27% compared to the previous quarter. Wall Street expectation was around 15%.

Data Center are the big GPUs that big companies like Meta, Google and Apple sell to data centers. This currently represents 82% of the company's total turnover. But what is very interesting is that the turnover increase in the category we call inferencing is around 40%. The difference with inferencing is that Nvidia's microchips are normally more successful in the learning function of artificial intelligence. What we call inference, that is, when a Tesla car makes the right decision at that moment and makes the right move on the road because it learns, this is called inferencing module. We thought that Nvidia was not very assertive on the side that provided this. For example, we thought that companies like AMD and Qualcomm would bring better products. When we look at it, there is an increase of around 40% here too. The market loved this.

On the other hand, there is a 100% growth in the number of applications using Nvidia microchips compared to the previous year. They talked about some new products here. Hyper Scalers are said to drive the main growth. But there is another detail here. Apart from the general H100 chips, Nvidia also has chip and service solutions specialized in certain sectors in the vertical, and there, for the first time, it has exceeded 1 billion dollars in each of the automobile, health and financial sectors. For example, it designs systems suitable for autonomous driving in automobiles. He sells not only the chip but also the turnkey system to a large automobile company. For example, we can say that Tesla is a rival here. A billion dollar turnover has been reached in each of the sectors I just mentioned.

They were not so pessimistic on the Chinese side. They said we will stay more or less where we are today. This was again one of the news that the market loved. In other words, the company says that we can actually expand into new areas, we grow through inferencing. We are growing in automobile autonomous driving. We can create new areas. They exist in the metaverse for this and the CEO said that we have reached the Tipping Point in artificial intelligence. He said the real growth will happen from now on and I completely agree with him. I explained that it showed that we are very close to an artificial intelligence that can do everything that a human mind can do better, that we can get there maybe in a year or two, and that the only obstacle here is more powerful GPUs, which is why Sam Altman is seeking a 7 trillion dollar investment. I mentioned that it was.

Now I would like to present you another interesting evidence regarding this. Sora's ability can turn what a person imagines into a simulation. So some of them are fun simulations like cats and dogs playing in the snow. But if you wish, you can also transfer the operation of a factory, the design of an automobile or the functioning of a robot to a simulation environment. We see that robot manufacturer RSL makes robot simulations using Nvidia's simulation tools, and they transfer what they have learned in this simulation environment, that is, what they have learned in the virtual environment, to robots in the physical environment. Thus, physical robots can easily achieve in the physical environment what they have learned through thousands, hundreds of thousands of simulations in the virtual environment.

That's why Sora's simulation package is so important. Because Sora says we can increase the simulation quality beyond what you currently see on the screen. We can create real world models. As we create real-world models, we can design products, services, and solutions in the real world with the data obtained from these simulations. There will be significant impacts in many areas, from product designs to the development of spaceships. We know that stronger microchips are needed to achieve this. At least for now, Nvidia GPUs are far ahead in this regard.

Unfortunately, I had not reviewed Nvidia on the technology side as much as Tesla until the last month. That's why I think I haven't benefited enough from Nvidia's extraordinary rise. That's why I'm already trying to turn to more technology.

The information, comments and recommendations contained herein are not within the scope of investment consultancy. Investment consultancy services are provided within the framework of the investment consultancy agreement to be signed between brokerage firms, portfolio management companies, banks that do not accept deposits and customers. The comments in this article are only my personal comments and these comments may not be appropriate for your financial situation and risk return. For this reason, investments should not be made based on the information and comments in my articles.

 

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