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Nvidia Is Giving Me Dotcom Vibes

seekingalpha2023-12-28

For the second quarter in a row, Nvidia Corporation reported impressive quarterly results and revenue grew over 200% year-over-year.And in the last few months, Nvidia also grew into its valuation, but...

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quarterly results and revenue grew over 200% year-over-year.And in the last few months, Nvidia also grew into its valuation, but...</p>\n\n<a href=\"https://seekingalpha.com/article/4659919-nvidia-is-giving-me-dotcom-vibes\">网页链接</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4550","symbol_name":"红杉资本持仓","start_time":0,"source_url":"https://seekingalpha.com/article/4659919-nvidia-is-giving-me-dotcom-vibes","article_id":"2394396717","we_media_id":null,"thumbnails":[],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2394396717","pubTimestamp":1703723201,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"For the second quarter in a row, Nvidia Corporation reported impressive quarterly results and revenue grew over 200% year-over-year.And in the last few months, Nvidia also grew into its valuation, 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And while probably everyone else saw this coming, was bullish about Nvidia all along and – of course – invested in Nvidia and made huge profits, I must admit that I did not see this coming. About a year ago, I published an article when Nvidia was trading for $160 with the – in retrospective – unfortunate title “Still Huge Downside Risk.” In my conclusion, I wrote:Over the long term, we can be pretty confident that NVIDIA will continue to grow and profit by secular tailwinds. But over the next few years, we should be cautious with such optimistic expectations.And at this point, we can ask the question (which the article will try to answer) if we should now be bullish about Nvidia due to the secular tailwinds or if there is still reason to be cautious.Nvidia Growing Into ValuationIn my last article published in mid-June of 2023, Nvidia was trading for $427, and I rated the stock as “Hold.” In my article titled “What were you thinking?” I argued that Nvidia was trading for extreme valuation multiples. However, we must admit that Nvidia grew into its valuation, and in July 2023 the valuation multiples peaked with the stock trading for 247 times earnings and 232 times free cash flow.Data by YChartsOver the last few months, Nvidia's P/E ratio and P/FCF ratio declined and right now, the stock is trading only for 64 times earnings and for 69 times free cash flow. Of course, these are still extremely high valuation multiples, but Nvidia is growing with very high rates and the difficult task we are faced with right now is to assess if the high growth rates justify these high valuation multiples. At least when looking at the last quarterly results it seems easy to justify the current valuation multiples.Quarterly ResultsAfter Nvidia had already reported impressive results for the second quarter of fiscal 2024, the third quarter results were even better. Revenue increased 206% year-over-year, from $5,931 million in Q3/23 to $18,120 million in Q3/24 and for a major business this is an insane growth rate. Operating income increased from $601 million in the same quarter last year to $10,417 million this quarter and hence operating income increased 16 times year-over-year. Of course, we must point out that operating income in Q3/23 was extremely low. Finally, diluted net income per share increased from $0.27 in Q3/23 to $3.71 this quarter – resulting in 1,274% growth year-over-year.Nvidia Investor Presentation Q3/FY24And finally, instead of a negative free cash flow of $156 million in Q3/23, Nvidia generated $7,042 million in free cash flow this quarter. Not surprisingly, gross margin also improved year-over-year from 53.6% in Q3/23 to 74.0% this quarter.Growth, Growth, GrowthWhen looking at the results, the sentiment surrounding Nvidia, analysts’ estimates or the last earnings call, it is difficult to find a reason not to be bullish and extremely optimistic.When looking at revenue by market platform, the category everybody is looking at is “Data Center.” It has always been an important category for Nvidia, but right now it is the driver of growth. Revenue increased from $3,833 million in the same quarter last year to $14,514 million this quarter – resulting in 279% year-over-year growth. The market platform is also responsible for 80% of the company’s total revenue in Q3/24.Nvidia Investor Presentation Q3/FY24Management is pointing out that Nvidia is providing the infrastructure for the AI applications everybody is talking about right now:NVIDIA HGX with InfiniBand together are essentially the reference architecture for AI supercomputers and data center infrastructures. Some of the most exciting generative AI applications are built and run on NVIDIA, including Adobe Firefly, ChatGPT, Microsoft 365 Copilot, CoAssist, now assist with ServiceNow and Zoom AI Companion. Our Data Center compute revenue quadrupled from last year and networking revenue nearly tripled.And management seems to be very optimistic that we are only at the beginning with companies needing the hardware and infrastructure to run AI applications:The enterprise wave of AI adoption is now beginning. Enterprise software companies such as Adobe, Databricks, Snowflake and ServiceNow are adding AI copilots and the systems to their platforms. And broader enterprises are developing custom AI for vertical industry applications such as Tesla in autonomous driving.Additionally cloud service providers are also driving revenue growth and are responsible for about half of the Data Center revenue. And as the cloud market is expected to grow at a high pace, we can expect Nvidia to profit as well from this trend.Nvidia Investor Presentation Q3/FY24And it is not only revenue from Data Center, but other business segments are growing with a high pace as well. Revenue from Gaming increased 81% year-over-year to $2.86 billion and has doubled relative to pre-COVID levels despite a rather mediocre PC market performance. Nvidia saw especially strong demand in the important back-to-school shopping season.For the full picture we can also mention $416 million in revenue from “Professional Visualization,” $261 million in revenue from “Automotive” as well as $73 million from “OEM and Other.” However, compared to the other two market platforms these are hardly worth mentioning.Intrinsic Value CalculationIn my opinion it is extremely difficult to calculate an intrinsic value for a company like Nvidia. The best-case scenario is to have a business that is growing with a stable pace for decades with high levels of consistency. I think it is very obvious that Nvidia will not continue to grow with a similar pace as in the last two quarters. But estimating what growth rates are realistic is rather difficult. Will Nvidia continue to grow at 20% or more, will it grow at 10%, or will we see almost no growth or declining revenue in the next few years (a scenario that is possible as well).In such a case, I usually try to turn the question around and calculate what growth rates we need in the years to come for Nvidia to be fairly valued. As basis for our calculation, we use 2,494 million outstanding shares and the free cash flow of the last four quarters (which was $17.52 billion). And as we want an annual return on our investment of at least 10%, we use that as discount rate.Right now, Nvidia is trading for $500, and to be fairly valued, the company has to grow its free cash flow between 22% and 23% in the next ten years followed by 6% growth till perpetuity. When looking at current growth rates, I assume almost nobody has doubts that Nvidia can grow at least 22% for the next few years. And in the last ten years, Nvidia was able to grow with a CAGR of 22.70%.However, Wall Street analysts expect earnings per share to grow only with a CAGR of 14.6% in the years between 2024 and 2033. The same analysts are extremely bullish – and, in my opinion, this is not making any sense. And if Nvidia can grow its bottom line only 15% annually, the stock would be overvalued (intrinsic value would be about $300 in that case).I am also trying to be rather cautious and only calculate with growth rates I can justify. And while I can – in theory – imagine Nvidia growing 22% annually for the next ten years, I can also imagine the company growing with a slower pace.Dotcom Bubble VibesWhile Wall Street seems to be extremely bullish about Nvidia, Seeking Alpha seems rather split between bulls and bears, and several analysts have recently argued that Nvidia is in a bubble.Seeking AlphaAnd like Building Benjamins, I also drew a comparison to several Dotcom companies in 1999 and 2000 in my last article about Nvidia:It seems like \"artificial intelligence\" might be a similar hype as the Internet almost 25 years ago. The patterns are very similar. And I am expecting Nvidia (the stock) to follow a similar path as several companies during the Dotcom bubbles - the names to google would be Intel, Cisco Systems, Inc. (CSCO), or in the case of Germany, Deutsche Telekom AG (OTCQX:DTEGY). Artificial intelligence will most likely have a sustained and huge impact on our lives and impact almost everyone and every company. And it has the potential to boost the economy - but similar to the Dotcom bubble and the Internet, it might take several years (or maybe a decade) before this effect will become visible.When looking at Nvidia, it is difficult not to get Dotcom bubble vibes: a company growing with exceptional growth rates, investors assuming these growth rates to continue although everybody should know this is not possible.And we could face a similar problem as in the late 1990s. Stanley Druckenmiller described the situation that led to the Dotcom bubble burst. The Internet infrastructure was built in the late 1990s at a very rapid pace, and the companies involved reported extremely high growth rates in these years. Druckenmiller compared it to the construction of a railway system: As long as the infrastructure is being built, growth rates are extremely high. But once every major town is connected, growth will suddenly vanish as no more infrastructure is necessary (at least not before the existing infrastructure needs to be replaced). Back in 1999/2000, obviously, very few people could see the problem – including Druckenmiller. And I already wrote about this in an article published in July 2021:The problem for companies like Cisco or Deutsche Telekom was especially the insane growth expectations investors had for the future, which led to extremely high valuation multiples. And if Cisco or Allianz would have been able to grow with a similar pace than in the years before 2000, the valuation multiples might have been reasonable to some degree.(…)But in 2000 growth rates suddenly slowed down in a dramatic way and suddenly these high valuation multiples seemed completely absurd, and this led to 90% declines for these stocks. Of course, there were also companies that survived the Dotcom bubble and could actually keep up high growth rates – Amazon (AMZN) and Microsoft (MSFT) would be two examples (although buying Microsoft in 2000 was also no pleasure for investors in the following 16 years).In \"The NVIDIA/AI Singularity: Breakthrough, Bubble, or Both,\" Rob Arnott and his colleagues show how some of these companies performed after 1999/2000.Research AffiliatesAnd the authors also describe the problem we saw with these stocks in 1999/2000 and maybe again today:Our point is that even correct narratives can take longer to play out than most investors expect (…) Overconfident markets paradoxically transform brilliant future business prospects into even more brilliant current stock price levels.And in the case of Nvidia, so much overconfidence about brilliant future business prospects is reflected in the stock price of Nvidia. The question right now is, if Nvidia could face a similar problem as Cisco did, and if the demand for “AI infrastructure” might also fall off a cliff once the major companies have enough server and cloud capacity to run AI applications. I personally don’t think the comparison to 1999/2000 is accurate, but on the other hand I don’t have enough information to draw accurate conclusion about what the demand for GPUs will be in the years to come.However, another aspect we should keep in mind is the danger of investing in “expensive” stocks. In Investing in AI, Kai Wu is showing how “expensive” Internet stocks performed compared to “cheap” Internet stocks — and this is underlining once again the investment philosophy not to buy hyped and overpriced companies.Sparkline CapitalThe author is also showing that the performance of the expensive Internet stocks had nothing to do with the fundamental performance. The underperformance stemmed in huge parts from the contraction of valuation multiples.Sparkline CapitalConclusionI honestly did not expect Nvidia to grow at such a high rate, and I was also wrong in my last article about Nvidia, as the stock climbed another 25% with valuation multiples being lower now than in the summer of 2023. And, of course, I could be wrong again – especially as Nvidia is growing with a high pace that I did not expect, and maybe the company will be able to grow at 22% or more annually, justifying the current stock price.But for me, that is just not a bet I want to make. It is not my style of investing – I want to stay away from companies and stocks that could be in a bubble, as history has shown as that these stocks could generate immense profits but also decline extremely steep and destroy wealth for several years (or sometimes even decades). And it feels rather like a bet than an investment to put my money on Nvidia at $500.I wish you all the best for 2024!","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"hasMoreComments":false,"newsSizeData":{"likeSize":1,"commentSize":0,"repostSize":1,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}