Market expectations for growth are too high! This is the real risk for NVIDIA
Considering NVIDIA's relatively high expected growth, its valuation is not more expensive than other tech giants. However, the key point is that if future growth expectations are overly optimistic compared to reality, NVIDIA's stock price may face the risk of significant adjustments
Despite encountering a triple witching day last week, coupled with negative factors such as executive selling and institutional profit-taking at the end of the quarter, NVIDIA's stock price experienced a sharp decline. However, considering that the AI boom is still ongoing, as the "most important stock on Earth," its fundamentals have not changed. Over the past 5 years, the stock has soared by 4000%, ranking alongside Microsoft and Apple as one of the world's highest market cap companies.
However, whether the extremely high growth rate can be sustained is currently a key concern for the market.
Considering NVIDIA's high expected growth, it is not more expensive than other tech giants
The moat built by the CUDA software ecosystem and GPU hardware has made NVIDIA the leading player in the AI chip market, holding approximately 90% market share. Over the past five years, NVIDIA's revenue CAGR has reached 64%, ranking first among S&P 500 constituents.
However, is NVIDIA a good investment target? Nir Kaissar, founder of asset management firm Unison Advisors, stated in a column on the 24th that to answer this question, valuation factors need to be considered. Companies with high growth and high profits often command a premium, and NVIDIA is no exception. With a P/E ratio of 76 times, it is over 3 times that of the S&P 500 index and 2 times that of Microsoft and Apple.
Nir Kaissar mentioned that investors may argue that they value NVIDIA's future rather than its past; according to Wall Street analysts' estimates, NVIDIA's long-term profit growth rate for the next 3-5 years is 43%, significantly higher than Microsoft and Apple. Based on this growth rate, NVIDIA's long-term P/E ratio is around 18 times, comparable to Microsoft and Apple.
In other words, considering NVIDIA's high expected growth, it is not more expensive than other tech giants.
Overly optimistic expectations are the real risk
Nir Kaissar wrote that for a new AI company like NVIDIA, the uncertainty of future growth expectations is much higher.
Current market data shows that the volatility of NVIDIA's long-term growth expectations is three times that of Microsoft and four times that of Apple, which means that if future growth expectations are overly optimistic compared to actual performance, NVIDIA's stock price may face significant downside risks.
Nir Kaissar cited an example of Cisco in the article. Just like NVIDIA chips driving artificial intelligence today, routers manufactured by Cisco in the 1990s propelled the vigorous development of the Internet, and the frenzy of Internet stocks once made Cisco the most valuable company in the world.
During the decade from 1991 to 2000, Cisco's operating profit grew at an annual rate of 71%, reaching $4.6 billion in profit in the 2000 fiscal year, with a P/E ratio of 233 times. However, when the Internet bubble burst in 2000, Cisco's fate quickly changed.
In the 2001 fiscal year, Cisco's operating profit plummeted to only $21 million, taking two years to recover to the 2000 level, and the P/E ratio also dropped to 39 times. Since then, its valuation has been on a downward trend and has not been able to return to its peak periodKaissar believes that while this does not necessarily mean that NVIDIA will inevitably repeat past mistakes, it reminds us that in rapidly developing emerging industries, overly optimistic expectations carry risks. Some analysts have observed that some companies are cutting back on spending for new AI tools, which may be a warning signal worth noting