There seems to be lots of speculation among investors at the moment as to whether a stock market crash is looming. Many believe there are similarities between the current enthusiasm for all-things artificial intelligence (AI) and the bursting of the dotcom bubble in 2000.
And as the manufacturer of the semiconductors that underpin the AI industry, Nvidia (NASDAQ:NVDA) is seen as a barometer for the health of the sector and for the stock market in general.
That’s why all eyes were on the group’s earnings update last Wednesday (19 November). Prior to publication, there appeared to be a widely-held view that if Nvidia’s revenue or profit showed any sign of a slowdown — or fell significantly short of analysts’ expectations — then this would lead to a stock market crash or, as a bare minimum, a market correction.
The world’s most valuable company
Fortunately, the group did better than expected. Revenue for three months to 31 October was 62% higher than for the previous quarter. And its earnings per share was 3.2% above what analysts were forecasting.
But given the amount being spent on AI – and the need for an ever-increasing number of chips – this doesn’t surprise me. The group’s boss said: “There’s been a lot of talk about an AI bubble. From our vantage point, we see something very different.”
Investors now value the group at close to $4.5trn (£3.4trn). Expressed another way, it’s worth 16 AstraZeneca’s. In fact, it’s valued at over 40% more than the entire FTSE 100.
Cheap as… chips?
Despite this, I don’t think Nvidia’s over-valued. And leaving Tesla to one side, the rest of the Magnificent 7 aren’t badly priced either.
Over the past four quarters, the chip maker’s reported earnings per share of $4.03. Although its stock isn’t cheap, I think a price-to-earnings ratio of around 45 is justified given its impressive growth.
Of course, it can’t continue like this forever. Restrictions on exports to China are a major problem and could enable a competitor to get a foothold in the market.
And don’t get me wrong, there’s likely to be a sharp correction in its share price if (when?) its earnings begin to slow. But after a while, it will probably start to recover again. This reflects the typical ebb and flow of stocks and shares.
Nvidia’s clearly the market leader in its field and its Blackwell chip is setting new standards for processing power. That’s why, despite its generous valuation, I still think the stock’s worth considering.
Final thoughts
But I don’t think Nvidia’s market cap is really the issue when it comes to determining whether there’s an impending stock market crash.
Instead, there are plenty of examples of other companies that are attracting huge valuations on the back of little more than hope. This concerns me greatly. If investors lose confidence in these (which, in my opinion, is highly likely) then we will see a stock market crash.
But this would be nothing new. Apparently, there have been 19 of them over the past 150 years. Clearly, one will come soon.
Despite this, I reckon AI’s here to stay. This means Nvidia will be selling its chips for decades to come, long after plenty of over-hyped companies in the industry – with silly valuations — have gone to the wall.
