Just a week ago, Nvidia became the most valuable company in the world.
The chipmaker – whose shares have risen ninefold since the end of 2022 – surpassed Microsoft as its stock market valuation reached $3.34 billion (£2.63 billion).
Since then, shares have fallen 13%, falling in each of the last three trading sessions.
This was enough to cut more than $500 billion (£394 billion) from from Nvidia stock market valuation was achieved when, last Thursday, shares reached an all-time intraday high of $140.76 (£110.94) each (taking into account the 10-for-one stock split completed in beginning of this month).
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To put this in context, Exxon Mobil – the 14th largest company in the S&P 500 index and itself one of the few companies to ever achieve the status of the world’s most valuable company – has a stock market valuation of 511 billion dollars.
So, what is happening?
There are several factors at play.
The first is profit making. Nvidia shares, before last Thursday, had a fantastic run and attracted a lot of money from so-called “momentum buyers” who see a stock rising and jump on board to profit from the ride.
It was natural for these buyers to make profits from the sale.
Added to this is the advance of speculative money. A report over the weekend in the Wall Street Journal that Facebook parent Meta Platforms had held talks with Apple about integrating Meta’s generative AI model into the recently unveiled Apple Intelligence system sent the stock soaring, as profits from Nvidia’s recent strong run have been recycled.
That money didn’t leave the market – it was simply transferred from Nvidia to other stocks, mainly Meta and Apple, but elsewhere as well.
This can be demonstrated by the fact that Nvidia’s sell-off, while dragging down competitors such as Broadcom, Taiwan Semiconductor and Super Micro Computer (a server maker that is a large buyer of Nvidia chips), did not lead to a further sell-off. broad.
The Dow Jones, admittedly not as good a barometer of the U.S. stock market as the S&P 500, hit its highest level in a month on Monday, even as the S&P 500 and Nasdaq, both of which are more heavily weighted toward Nvidia, were falling.
Also contributing to the sell-off was the revelation – via a filing with the US’s top financial regulator, the Securities & Exchange Commission – that Jensen Huang, Nvidia’s founder and chief executive, had taken advantage of the recent rise in its share price to reduce your possession.
Huang, who founded Nvidia in 1993, sold just under $95 million (£74.9 million) worth of shares between Thursday, June 13 and Friday, June 21. Nor is Huang – who still owns more than 866 million Nvidia shares valued at $102.3 billion (£80.3 billion) at Monday night’s closing price – the only director who has sold recently.
Nvidia CEO Jensen Huang is among the directors who sold shares recently
Mark Stevens, a veteran venture capitalist who has been on Nvidia’s board since 2008, sold $28m (£22m) worth of shares this month, while Tench Coxe, another VC who was one of Huang’s early backers and who is on council since inception, sold $119.5m (£94.1m).
Selling by directors is not always a reliable guide to a company’s prospects. Sometimes it reflects personal factors, such as divorce or estate planning, rather than indicating what a director thinks about a company’s prospects. Right or wrong, however, it is generally considered a negative sign.
Perhaps the most significant factor in the selloff is that some investors have been looking at Nvidia through traditional investment criteria.
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The main one is the price/earnings (P/E) ratio. The higher the P/E ratio, the more expensive a stock will be valued.
Last week, following its latest earnings, Nvidia shares were changing hands at a price 45 times expected earnings.
To put that in context, the forward P/E of the S&P 500 is 22 times and the Nasdaq just a little more. Put another way, investors placed more than twice as much value on Nvidia’s future earnings than those of its peers.
Furthermore, as influential investment magazine Barron’s pointed out over the weekend, Nvidia was being valued at around 20 times expected sales for the year to the end of January 2026 – a cheeky valuation, to say the least.
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Stocks with this kind of valuation have to justify it with spectacular earnings growth.
However, as Barron’s columnist Eric Savitz pointed out, Nvidia’s quarterly earnings growth over the past four quarters has slowed from 88% to 34% to 22% to 18%. Now, quarterly earnings growth of 18% is still pretty spectacular. But it doesn’t exactly justify a price/earnings multiple that went from 25 to 45 last year.
Pointing out that from 1976 to 2020, stocks trading at P/E ratios greater than 15 tended to underperform, Savitz added: “I know what you’re thinking. It’s different this time. This is AI! And sure, maybe AI really is the most important thing to happen in technology since cloud computing, or the internet, or cell phones, or even the personal computer. But the numbers worry me.
“Nvidia’s market value is now nearly five times the industry estimate for next year’s global chip sales – yes, the total of all companies worldwide. Microsoft has seven times the number of employees as Nvidia and double sales. Apple has five times more employees, and triple sales volume. However, last week, Nvidia’s market value surpassed both.
Savitz wasn’t the only investment columnist to suggest that perhaps Nvidia stock might be overvalued.
Part of Monday’s sell-off was also fueled by the highly influential “Heard on the Street” column in the Wall Street Journal which, over the weekend, invited readers to cast their minds back to the dot-com bubble at the turn of the century. and, in particular, the fluctuations observed at that time in Cisco Systems shares.
Cisco, the Journal reminded its readers, was favored along with stocks like IBM, Lucent and Intel — companies whose hardware was at the forefront of connecting families and businesses to the Internet. By the end of 1999, it had become the most valuable company in the world.
The Cisco comparison has undoubtedly hurt sentiment toward Nvidia in some quarters.
Pointing out that today Cisco is valued at 40% less than it was then, the Journal highlighted that, at its peak in March 2000, Cisco shares were valued at 131 times future earnings, despite a less impressive financial performance than than recently demonstrated by Nvidia.
See more information:
How Nvidia rose to the top of the market
Emphasizing that Nvidia was not as valued as Cisco, the column added: “However, this does not necessarily make Nvidia shares safe at their current level.
“The stock has seen a huge influx of individual investors since the company’s latest financial results last month. Daily retail traffic has averaged nearly $141 million since earnings, compared with a daily average of about $39 million during the previous month, according to Vanda Research.
“Sell-side analysts are also getting quite exuberant. Several have raised their price targets since the June 10 stock split. And at least four of those targets are now at $160 or higher, which would put the capitalization of Nvidia’s market closes to $4 trillion at its current share count.
“Nvidia may be AI’s premier weapon, but investors should be careful not to write checks that the stock can’t cash.”
Exactly.
AI is still a nascent technology and it is impossible to know from here who the biggest winners from it will be over time.
Just like investors in 1999, when trying to predict who the world’s biggest winners would be from the widespread adoption of the Internet, they couldn’t know.
This story originally appeared on News.sky.com read the full story
