Is NVIDIA in a bubble about to pop?

NVDA is the hottest stock on the market right now. The main reason is the world's obsession with AI developments. Many refer to this as the AI bubble, similar to the tech bubble in the early 2000s. 

This is the CSCO chart that is being quoted on the socials. See the staggering drop during 2000s. If you bought at the peak that is a 80% drop that took 24 years to recover.

But there was a major difference. PE ratio at the time for CSCO was 200+ with no clear growth path for earnings. In fact 2001 the company had a $1BN loss. Over the long term prices revert to the mean and only keep growing in line with earnings. 

NVIDIA PE Ratio

Take a look at this chart for NVIDIA, which looks at price (black line) vs. historical PE.

The blue line represents the "Normal PE Ratio" which is historical PE ratio that the company is trading for. That is PE of 53. That is not crazy and if you look into 2027 the earnings are expected to grow 118% by end of 2025, 38% in 2026 and 21% in 2027.  This is what analysts expect. 

So if the multiple of 53x persists and the earnings grow at the expected rate for the next 2 years, what stock price can we expect. At the same multiples stock should hover around $250/share. That is 114% growth or 38% annualized.

Question we need to answer, are these growth expectations realistic?

NVIDIA Growth Expectations

Main growth driver for NVIDIA is chips, flagship being the Blackwell chips that all comes down to production capacity. From the latest earnings call the company addressed production capacity!

Production Capacity:

• NVIDIA has been ramping up its production capacity significantly. The company expects supply to increase each quarter through the next year, indicating strong confidence in meeting the growing demand for its products, including the Blackwell chips.

  • The GH200 Grace Hopper Superchip, which combines the ARM-based Grace CPU with the Hopper GPU, has entered full production and is being shipped to multiple supercomputing customers. This is a crucial element in NVIDIA's strategy to cater to the demand for generative AI applications.

On the Demand side of things, CEO reiterated many times that demand far exceeds the supply and all they need to do is ramp up production.

Nvidia currently controls 70-95% of the AI chip market.

NVIDIA Earnings vs. Analyst Estimates

So clearly, earnings are expected to grow, and if Blackwell's production ramps up, there is no reason to expect otherwise. Here is a quick look at how analysts predicted earnings vs. what the company actually delivered.

For a one-year outlook, NVIDIA beat expectations 67% of the time and met expectations 17%.

For two year outlook, NVIDIA beat expectations 58% of the time and met expectations 33%.

If NVIDIA can continue to meet expectations, it will not look like the stock is in a bubble.

Is AI a fad or here to stay?

None of this matters if AI is a short lived fad that goes away in a few years. I strongly don't believe that it is a fad.

Here is why:

Continued Investment and Innovation

• Substantial investments are driving ongoing progress in generative AI, leading to new tools for text, video, image, and audio generation.

• Major tech companies and startups are heavily investing in AI research and development, indicating a long-term commitment to the technology.

Expanding Applications

AI is finding applications in diverse sectors:

• Healthcare: Enhanced patient communication, disease detection, and AI assistants for healthcare professionals.

• Education: Personalized learning experiences, innovative content creation, and AI-powered tutoring.

• Manufacturing: Rapid prototyping, digital twinning, and simulations.

• Science: Climate change mitigation, sustainable agriculture, and accelerated drug discovery.

Evolving Capabilities

• Multimodal AI: Combining numeric data, text, images, and video for more comprehensive and accurate outcomes

• Small Language Models (SLMs): Making AI more accessible and efficient, even on smaller devices like smartphones

• Customizable AI: Tailored solutions for niche markets and specific industry needs

Integration into Everyday Life

• AI is becoming more accessible and integrated into technologies that improve everyday tasks
  

• Workplace AI is enhancing productivity and efficiency across organizations

I hope this is somewhat helpful to those who are thinking about investing in AI-related companies, especially NVIDIA. I don't have a position in NVIDIA and will be doing more research on it.

Happy Investing,
Andy

Disclaimer
I currently do not have an active position in any of the companies mentioned above but am thinking of initializing in the next few days. As usual, the information provided in this newsletter is for general informational purposes only. All information in the newsletter is provided in good faith, however, we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, or completeness of any information. The content of this newsletter does not constitute financial advice, investment advice, or any other type of advice and should not be relied upon for any individual circumstances. We are not financial advisors, and you should consult with a professional before making any investment decisions. Any action you take upon the information in this newsletter is strictly at your own risk, and we will not be liable for any losses and/or damages in connection with the use of our newsletter.