To The Moon

Recently, AI concept stocks have experienced consecutive pullbacks, with NVIDIA, a leading stock, seeing two declines of nearly 5% within a span of six trading days. Morgan Stanley released a research report this week, in which the company's stock strategist, Edward Stanley, analyzed 70 bubble cases from the 20th century.

He found that in the three years leading up to the peak of stock market bubbles, stock prices on average increased by 217%, with a median increase of approximately 154%.

However, NVIDIA has experienced a maximum increase of over 229% this year!

The analyst also mentioned that the MSCI AI Index has grown by less than 50%, implying that NVIDIA's increase has been disproportionately high!

So, does NVIDIA have a bubble? And how significant is this bubble, if it exists?

From a valuation perspective, it is undeniable that NVIDIA, whether compared to its own historical performance or to Cisco during the dot-com bubble, is at a staggering "high level":

This is also the aspect that most investors criticize NVIDIA for.

However, the semiconductor industry has entered a downturn cycle over the past year, leading to a significant decline in demand for NVIDIA GPUs and causing a negative revenue growth. But the contribution of AI to the revenue only became evident in the second quarter.

According to management's projections, NVIDIA's revenue for the second quarter is expected to be around $11 billion. Based on this, analysts predict that the company's revenue for the fiscal year 2024 could reach $43.1 billion and $58 billion in 2025:

Currently, NVIDIA's market capitalization is 1.05 trillion. Calculated using the complete AI contribution to revenue for the year 2024, its Price-to-Sales (P/S) ratio valuation stands at 22 times. While it remains relatively high historically, it is far less exaggerated than the current P/S ratio of 41 times.

Looking at NVIDIA's history, during the era when it relied on gaming graphics cards, its Price-to-Sales (P/S) ratio was around 3 times. After 2015, benefiting from the explosion of the data center business, even during the semiconductor industry's downturn cycle in 2018, NVIDIA's valuation still increased to around 7 times.

In 2022, AI experienced its "iPhone moment," leading to a massive surge in downstream demand. Furthermore, this market is even larger than the data center segment. Against this backdrop, NVIDIA's valuation has once again reached a new peak.

At present, the AI industry is still in its infancy, with industry demand primarily concentrated on large-scale models. Looking ahead, the requirement for computing power from vertical models and applications across various sectors will be even more substantial.

Most crucially, in such a promising market, NVIDIA holds a monopoly, with only AMD and Intel as competitors. However, these two companies are not particularly adept at GPUs, resulting in minimal erosion of NVIDIA's market share.

While the prospects of AI are promising, NVIDIA's performance still requires time to fully flourish. Given its high valuation and significant price increase, a stock price correction is quite normal.

Therefore, it is worth considering the argument that NVIDIA is in an unprecedented bubble. It can be said that the current valuation has priced in a substantial portion of the future growth, limiting the potential returns for those entering the market now. However, looking over an extended timeframe, such as two years or more, a trillion-dollar market cap for NVIDIA is certainly not the peak! $NVIDIA Corp(NVDA)$ $Cisco(CSCO)$ $Microsoft(MSFT)$

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