One week / one topic: Nvidia, to the moon

What happened?

This week, Nvidia briefly became the most valuable stock in the world and is now essentially on par with Tech royalty like Microsoft and Apple.

The speed of its rise has been absolutely breathtaking. 18 months ago – shortly after the release of ChatGPT – Nvidia was worth ‘only’ $360bn (1/5 of Microsoft back then). It is now on par with the software giant, after adding two trillion dollars of market capitalization just in the last year.

(Past performance is not a guide to future performance)

Comparisons with the Dot Com bubble are misguided, since back then unprofitable and revenue-less startups were ballooning just because the had added ‘.com’ to their name.

Today, Nvidia’s 2024 Data Center revenues are estimated at $100bn – growing seven-fold in two years – and it earned a $15bn net profit last quarter alone. If we extend the analysis to other ‘Magnificent Seven’ companies, we are of course looking at very large and consistent profit pools.

Stock prices may well fall from there, but this is not March 2000.

Despite very similar valuations, Nvidia (founded in 1993) is also a much younger company than Microsoft (1975) or Apple (1976) and it remains much less of a household name. How many consumers (or investors) know what the company actually does, or have actually directly experienced its products?

Also, while it is a much less diversified business, Nvidia can boast a virtually unheard of 57% net margin thanks to the dominant position of its GPU suite.

While the almost vertical price action is inevitably inviting concerns about a ‘bubble’ or ‘mania’ in the stock, Nvidia remains the perfect story for (retail, but not only) investors to latch onto since:

• AI is seen as holding the promise to ‘change the world’ – and Nvidia’s GPU are essentially indispensable as of today.

• The hero’s journey of its charismatic Founder/CEO Jensen Huang makes for an irresistible narrative. Plus, black leather jackets.

• The most deep-pocketed customers in the world (i.e. Big Tech) literally can’t get enough of its product, and are resorting to curry favour by posting about their bromance with Mr Huang (aka the ‘Taylor Swift of tech’).

While the impact of Nvidia is hard to overstate even at the index level – it accounts for ~35% of S&P 500 returns year to date – it is perhaps more relevant for multi asset investors as the poster child for the dominance of ‘Magnificent 7’ stocks.

Importantly, Nvidia’s can also be seen as the ‘canary in the coal mine’ for more profound changes – reminding us of how indexation, systematic strategies and meme-prone retail flows have seemingly reduced the importance of intuition and fundamentals.

What should investor make of it all? Should they adapt?

And, if so – how?

Our observations

• Fundamentals: Moving beyond single-stock considerations, US mega cap Tech has delivered vastly superior earnings growth for a very long time. While nothing lasts forever, these stocks do deserve premium valuations... the question: is this too much?

• Price action: Equities markets are dominated by outliers, as ~1% of stocks account for total net wealth creation. Upset about Nvidia’s performance? This is what you should expect! Hate the game, not the player… and diversify your portfolio

• Investor beliefs: Financial assets are social constructs. When summarizing the totemic value ascribed to some of them, a famous ad campaign comes to mind: “You never actually own a Patek Philippe Microsoft share. You merely look after it for the next generation.”

So what?

When a single stock is so big and moving by so much as Nvidia, ignoring it – even in the context of global multi asset portfolios – is virtually impossible. (and probably not advisable either)

For context, its market cap has oscillated by $50bn per day on average in 2024.

Using a poker analogy, we can then perhaps summarize the choices available to investors as follows:

1. Play the cards, i.e. embark upon a thorough fundamentals analysis of Nvidia’s prospects and position accordingly;

2. Play the player(s), i.e. look for extreme (or insufficient?) levels of optimism/pessimism and position accordingly;

3. Refuse to play, i.e. resist being distracted by wild, concentrated market swings and maintain a diversified exposure, i.e. ‘neutral’ positions across ‘Mag 7’ stocks (including Nvidia);

4. Change the game, i.e. develop views on implied volatility or correlations and trade derivatives… assuming you can spot more interesting opportunities there.

In this instance, we have indeed chosen to maintain neutral position levels and we own ‘Mag 7’ stocks in line with a representative opportunity set across global equities.

While we retain conviction in the importance of fundamentals as one of the core pillars of our investment approach, the fact that Nvidia has actually recently gotten cheaper – its forward P/E ratio (white, top panel) came down while earnings (green) grew 100x over the last decade – is a reminder that there are indeed no easy answers here.

As (current) AI models are trained on accumulated human knowledge, I have very low confidence that even the next iteration of ChatGPT could accurately answer the question: where is Nvidia stock going to trade one month from now?

In fact – if the AI model had a sense of humour – it might reply by quoting Isaac Newton’s remark after losing his shirt in the South Sea bubble: “I can calculate the motion of the heavenly bodies, but not the madness of people”.