Revisiting the Nvidia Cult; the Nvidia Conundrum
Editor’s Note: The rise of Nvidia is continuing as its market capitalization recently soared past $2 trillion. We are re-sharing our June 8 column from last year, since it highlights Nvidia’s meteoric growth and deals with the same questions that have resurfaced in the past week about how high the company’s share price can go.
We are on record—just a few monthly editions of Gilder Technology Report ago—as saying that Nvidia is the most important company in the world. We stand by that.
The advent of practical artificial intelligence (AI) was not inevitable, and certainly not at this moment. It was not merely the result of a massive collective movement assembling irresistible intellectual forces. It was not achieved by brilliant software engineers making the most out of the available machines. It was not the result of fertile intellectual exchanges across multiple academic and industrial players.
Yes, all those things happened, and all contributed. But what really mattered is that one company, Nvidia, developed a unique piece of hardware, the GPU, or graphical processing unit, into a device that made AI a practical and affordable reality.
Created originally to power brilliantly realistic graphics for computer games, the GPU is a massively parallel processor that has the one skill of performing simple, tightly defined, iterative calculations hundreds or thousands of times faster than the Central Processing Units (CPU) that dominate most computing. Because AIs learn by iterating billions of instances, the Nvidia GPU made AI practical.
Nvidia has changed the world as powerfully as Intel did in 1971 by releasing the first microprocessor (the 4004), the first mass producible DRAM (dynamic, random-access memory), and the first EPROM (electronically programable read only memory) within months of each other.
Other companies, notably AMD, make competing GPUs. But Nvidia stands astride the AI world like a Colossus in part because its growing software suite holds out the promise of making AI—about the most complex computational procedure ever—if not simple then plausibly doable by essentially any reasonably sophisticated enterprise.
Having established that Nvidia dominates AI, the next question—and the current obsession of the tech social media universe—is whether, at a price-to-earnings (P/E) ratio hovering around 200 and a price to sales ratio pushing 40—NVDA can possibly be a good investment.
Should you sell?
Nvidia has become not just a cult stock but a mega-super-hyper-cult stock. We should run the other way, right?
The answer is, at least, non-obvious.
Maybe this time the Kool-Aid is cool?
The thing is that there have been a lot of cult tech stocks that looked overpriced for years, but repeatedly went on to vindicate apparently ludicrous valuations. And by vindicate, we don’t mean that the market kept overvaluing them—though it often did—but that their organic growth vindicated their valuations, albeit with something of a lag.
We love Warren Buffett’s old chestnut about the market being a voting machine in the short term but a weighing machine in the long term. Cult tech firms like Apple, Amazon and Microsoft were all popular vote getters, but they all eventually became heavyweights.
Moreover, Nvidia’s current ridiculous multiples are largely the result of the market, wisely in our view, discounting cyclical setbacks in earnings (down more than 50% from last year) when pricing the stock. With earnings and price moving in opposite directions, the result can be silly P/Es like 200.
But NVDA’s P/E would fall by roughly half if the company’s net profit came back even to 2022 levels. And if it hits consensus revenue and earnings over the next few quarters, its P/E will come down to circa 35, robust but not ridiculous.
We’ll have a fair bit more to say about this next week and beyond. For now, we are confident in saying that even at its current valuation, Nvidia is not a bad investment. Quite possibly, however, the change it has wrought in our world will benefit many other Microcosm companies even more than itself.
Stay tuned.