To The Moon

Nvidia (NVDA) was the best performing stock in both the S&P 500 and Nasdaq 100 indices year-to-date with a 106% gain.

Even after doubling in value, Nvidia continued to advance another 25% during the after-market trading session yesterday.

If this trend continues, Nvidia's market capitalization is estimated to reach approximately $941 billion, and may even surpass the trillion-dollar milestone should the share price rise further when the market opens today. In that case, Nvidia would join the prestigious trillion-dollar group of companies, including Apple, Microsoft, Saudi Aramco, Alphabet, and Amazon.

Nvidia currently holds the position of the sixth-largest company in the world based on market capitalization. It surpasses renowned giants such as Berkshire Hathaway, Meta Platforms, Tesla, TSMC, LVMH, Visa, ExxonMobil, JPMorgan Chase, and Samsung.

However, in terms of revenue, Nvidia's global ranking stands at 432nd. This significant disparity in revenue ranking implies that Nvidia's Price-to-Sales (PS) ratio is considerably higher compared to other companies. In terms of earnings, Nvidia ranks 355th. Following the recent 25% surge in its stock price, Nvidia's Price-to-Sales ratio would increase to 35x, while its Price-to-Earnings (PE) ratio would reach 216x.

Some investors argue that relying solely on price multiple metrics may not be effective in evaluating Nvidia's value because the company is engaged in a significant technological transformation that is expected to drive rapid growth. Such metrics tend to portray stocks like Nvidia as expensive, but despite that, the share price can still continue to rise.

The primary technological shift at play revolves around the widespread adoption of artificial intelligence (AI), and Nvidia is exceptionally well-positioned to capitalize on this trend. This is primarily due to its leadership in graphics processing units (GPUs), which are the essential hardware components necessary for efficiently processing the intensive computational requirements of AI applications. If AI is the gold, Nvidia is selling the shovels to the gold diggers.

Nvidia's most recent quarter reported a 13% decline in revenue compared to the same period last year. However, this decline can be misleading as there is a clear acceleration in its Data Center segment, where the revenues related to AI are concentrated. On the other hand, other segments such as Gaming weighed down the overall growth of the company.

Displaying Nvidia Gains Another 2...

The Data Center segment of Nvidia has defied the overall trend by achieving a growth rate of 14%. While this growth may not appear highly impressive on its own, the revenue projection for the upcoming quarter is truly extraordinary. The projected total revenue of $11 billion represents a staggering 64% increase compared to the same period last year and a substantial 53% growth compared to the latest quarter. This exceptional projection is what triggered Nvidia's significant 25% gain. It clearly indicates that the AI craze has resulted in tangible and substantial growth for Nvidia.

Is AI a hype or is it going to revolutionalize our world? There is no denying the immense potential of AI and its ability to transform various aspects of our world, including work, art, music and video. We are already witnessing its infiltration into these domains.

However, it is important to acknowledge that there is a layer of hype surrounding AI as numerous companies rush to join the AI bandwagon. While this rush has led to increased demand for Nvidia's GPUs, it is likely that many of these companies will ultimately fail, leaving only a few winners. Consequently, the current surge in demand for Nvidia's GPUs may not be sustainable in the long term.

But shorting Nvidia isn't a good idea. The situation can be likened to a runaway train, where attempting to stand in its way or go against it can result in severe consequences. As the famous quote by Keynes suggests, "markets can remain irrational longer than you can remain solvent." It is uncertain how high the hype can propel the share price, making it unwise to go short and potentially face a margin call.

If you want to get involved in the stock, the safer way is actually on the long side. But if you must have an exit plan if you decide to hop onto this runaway train - jump out before the train crashes or derails. This entails implementing a risk management plan that includes setting a stop loss, which limits potential losses, and establishing a profit-taking target. It is important to avoid holding onto the stock while it undergoes a significant decline.

Lastly, there is the option of choosing to take no action at all. Simply letting go and not being overly concerned about the situation. By sitting on the sidelines and observing without feeling the pressure to participate in every potential winning trade, you can maintain a sense of detachment. It is important to recognize that it is unnecessary and unlikely to engage in every profitable opportunity. During such times, it is crucial to prioritize rationality and prevent yourself from making impulsive decisions. Allowing rationality to prevail can help safeguard against acting rashly in the face of market dynamics.

For those who are in the trade, kudos to you and enjoy the ride!

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