There are some companies where classic valuation metrics are not enough to tell their story. Stocks with extraordinary growth stories often overturn traditional valuation metrics. For example, Tesla $TSLA: At one time, its P/E ratio was above 1000. This is a nightmare for a value investor. However, despite the “overvaluation,” early investors in $TSLA made 20x returns because they considered its disruptive potential, not its high P/E ratio. Similarly, Amazon $AMZN traded at a P/E value between 300-1000 in the 2000s. Why? Because it focused on growth without profit for a long time. As a result, the company’s early investors invested not in short-term profits, but in Bezos’s “shop that sells everything” vision, and made 100x returns.
Another example is Nvidia $NVDA; its P/E ratio rose above 200 in 2023. Why? Because the explosive demand for AI chips has created growth potential that far exceeds expectations. As a result, it has provided investors with close to 10x returns since the 2022 lows. In other words, although the valuation may seem expensive, it has paid off to focus on companies that set a new industry standard. For example, when Shopify $SHOP’s P/E ratio exceeded 700 in 2020, many people said it was “overblown.” But in the middle of the pandemic, an e-commerce revolution was taking place. Those who believed in the company were rewarded with over 300% gains.
That same year, Zoom $ZOOM’s P/E ratio rose above 1000. Why? Because working from home had become the new norm, not the exception. And investors invested in the technology provider of this new norm, Zoom. As a result, the stock gained over 700% in just one year. All these examples remind us of a fact:
High valuations are not actually "expensive stocks to avoid", but rather opportunities for institutional investors to bet on big visions. If you focus too much on the fundamentals, you can completely miss the rally that took place during the bull market in great companies.
Today, Palantir $PLTR, the brainchild of artificial intelligence, is subject to the same discussions. With its high P/E ratio of 488, many people claim that it is a "BUBBLE". But does this high P/E valuation have any significance at the beginning of the artificial intelligence era?
Nebius (NBIS) and CoreWeave (CRWV) are two technology stocks that investors have been talking about lately. Both companies that provide artificial intelligence infrastructure basically operate data centers where they rent Nvidia chips to their customers. In this respect, they are extremely capital intensive and open to competition from hyperscalers like Amazon and Google in the long run. In the most crude interpretation, we can actually define both companies as Nvidia dealers. But they don’t just buy and sell like a simple dealer.
Both companies have software, optimization and various value layers that they add to Nvidia chips. This is how they define their competitive advantage. Due to the recent increase in demand for AI chips, both companies have seen high demand for their services and have grown rapidly. While CRWV provides solutions to the customized AI needs of giants like Microsoft, NBIS focuses on startups. Both companies are growing rapidly in turnover, but so are their huge losses and financing needs.
Their stocks have gained 200% and 30% respectively since the beginning of the year. CoreWeave has just gone public. I have not invested in either company. I have yet to find convincing arguments on how either of them can compete with hyperscalers in the long term. I am sure they add value to their customers in terms of software, integration and optimization, but the main reason they make money is still GPU rentals.
While GPU capacity is rapidly increasing in the world, I have never been convinced that they can develop a competitive wall that will protect them. GPU rentals are a very capital-intensive business and will definitely become a commodity. In addition, GPU depreciation periods are constantly shortening with the acceleration of new technologies. Don't let what I've said give you an idea about how the companies' stocks will move. I'm just explaining why I don't include them among my long-term investments. Of course, I could be wrong, both companies can develop new competitive advantages and be successful. They may also offer great added value in areas such as software and optimization, but I don't see it. But for now, they don't fit my long-term investment criteria. I'm not commenting on short-term trading opportunities. Remember: Vision sometimes looks expensive, but it takes more than cheap to buy the future. What do you think about this?
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.
