Something has been troubling me lately about the price moves of certain shares, notably in the tech sector. The recent run up in NVIDIA (NASDAQ: NVDA) shares, for example, set alarm bells ringing for me as it has echoes of previous stock market bubbles, like the dotcom boom in 2000.
Then again, some shares rebounded from that spectacularly.
Amazon slumped over 90% between December 1999 and March 2001. But today, Amazon shares are over 3,100% higher than they were in December 1999. Hopefully, for a long-term investor, quality can out – even if there are sizeable setbacks along the way.
So, could the sort of roaring prices we have seen lately for companies like NVIDIA suggest we may be in another stock market bubble? Or might they offer me a buying opportunity for the decades to come?
Bubble characteristics
A lot of recent tech share price gains – NVIDIA is a prime example but not the only one – have been driven by AI.
Past stock market bubbles have sometimes been driven by the emergence of what seems like a revolutionary new technology. As investors struggle to decide what firms will be the winners in a gold rush, they pour money into a wide range of companies based on an investing theme.
But while some prosper, others sink without trace. For every Amazon there was a plethora of other once-soaring shares that were sunk by the dotcom boom and never recovered. Hello, boo.com!
Often in a bubble, valuations seem extremely expensive. But fans of hot shares argue that those very valuations are in fact very cheap considering the future potential of a business operating in a high-growth sector of the economy.
With hindsight, that was true of Amazon in 1999.
What’s going on now?
Sadly, however, hindsight never makes an early appearance.
Is the surging price of AI stocks a sign of a stock market bubble?
On one hand, NVIDIA looks overpriced. It is currently trading on a price-to-earnings (P/E) ratio of 66.
But a superb quarterly earnings report last week showed that the business is growing at a rate of knots despite already being sizeable. It booked record quarterly revenue of $22bn, more than triple the figure for the same quarter a year before.
Net income for the full year soared an incredible 581% to nearly $30bn. That means that the already high-looking P/E ratio reflects a remarkable year. If earnings fall back again this year, the P/E ratio would be even higher than 66.
On the other hand, what if earnings surge again this year like they did last year?
The AI boom has a long way left to run in my view. NVIDIA expects revenues in the current quarter to grow around 9% compared to the previous quarter. If earnings can also grow this year, the prospective P/E ratio for NVIDIA could be far below 66.
I am not yet convinced that the NVIDIA share price offers me value.
But I also do not think it necessarily indicates a wider stock market bubble. In fact, many shares look positively undervalued to me at the moment, including in the UK.
For now I plan to keep watching the company’s financial performance. At some point, if I feel sufficiently attracted by the valuation, I may invest – but that point is not now.
