'Is Nvidia stock creating a dotcom-like bubble?’: Netizens question US chipmaker's $1-trn valuation

US chipmaker Nvidia’s stock surged 30 per cent on Thursday last week after the company announced its forecast of $11 billion in revenue for June quarter. Following this move, the stock price of Nvidia is now trading at 37 times its revenue (P/S) and 202 times its earnings (P/E).

Nvidia Corp breached the $1 trillion in market capitalisation on Tuesday, making it the first chipmaker to join the trillion-dollar club.

The gaming and AI chip company, whose shares rose 4.2% in early trading on Tuesday, was valued at $1 trillion.

However, netizens are scratching their head on how to value the stock, based on its current revenue and the future potential the company holds after its huge bet on AI.

One account that goes by the name ‘Market Sentiment’ on Twitter shared his thoughts on Nvidia’s stock price by quoting Scott McNealy, CEO of Sun Microsystems from 2002. Sun Microsystems was trading at $64 during the dot-com bubble in 2000 at 10 times the revenues. At the peak of the dot-com bubble, Sun Systems was valued at $200 billion, later sold to Oracle after the crash, for $7 billion.

“2 years ago we were selling at 10 times revenues when we were at $64. At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends.That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate,” said Scott McNealy in 2002.

“Now, having done that, would any of you like to buy my stock at $64? Do you realise how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking,” McNealy added.

An account which goes by the name ‘Bastion Research’ quickly jumped to counter the claims made by the ‘Market Sentiments’ account. He made these claims based on a Financial Times article.

Bastion research explained that in 2022, the US chipmaker released the H100, one of the most powerful processors Nvidia has ever built, costing about $40,000 each.

He added that 2023 should have been challenging for Nvidia due to low demand amid a financial slowdown across the world, but the launch of ChatGPT changed everything. The demand for data centre chips from big tech players like Microsoft, Amazon and Google exceeded all exceptions. Due to this change in the market conditions, Nvidia has already given 50% higher earning estimates than the Wall Street.

“Some customers have waited up to six months to get hold of thousands of H100 chips that they want to train their vast data models,” said the Bastion Research. This makes Nvidia two years ahead of its rivals but its position is far from unassailable.

One Twitter user also noted that Sun Microsystems was operating in a saturated market and its growth came at the expense of its competitors. He meant that for Nvidia, it’s just two companies which exist in the graphics processing chip market, Nvidia and AMD. Being in an oligopoly, Nvidia has more advantages over Sun Microsystems to grow in the market.

Cathie Wood’s ARK Investment sold their entire portfolio of 8 lakh shares in Nvidia, just before the stock exploded by over $500 billion in value. She defended her position by quoting that Elon Musk-led Tesla which trades at 6 times the revenues, as the most obvious beneficiary of the recent breakthroughs in AI.

“Based on our research for the last five to six years, ARK Invest sees dozens of AI winners,” said Cathie Wood.

However, Elon Musk has himself once said that Graphics Processing Units are considerably harder to get than drugs. In April 2023, Musk bought thousands of Nvidia chips for his new AI start-up X.ai. On the other hand, Tesla is already powered by AMD’s GPU.

Nvidia and AMD are two biggest and the only companies in the world that create ultra high speed performance GPU’s. The biggest chipmaker in USA, Intel, has also failed to achieve the level of performance that Nvidia and AMD’s GPUs can provide, which led to its ultimate decline in last few years.

Apart from Tesla, German car maker 'Mercedes-Benz' has also partnered with Nvidia to bring its next generation of vehicles into the autonomous era, building intelligent cockpits to redesign architectures for an AI driver.

"Given the valuation is well above the long-term average, there will be significant pressure to deliver high growth on a consistent basis ... there could be volatility in its share price to come," Susannah Streeter, head of money and markets at Hargreaves Lansdown, said.

AI took center stage after Nvidia stunned investors with a revenue forecast last week that surpassed analysts' expectations by more than 50%.

"Nvidia is the poster child for AI at the moment," said Thomas Hayes, chairman at Great Hill Capital. "The market is coming to terms with if this AI trend is real."

Not only GPUs but huge data centres with units capable of processing videos and graphics in seconds, are also being run by Nvidia and AMD chips.

Nvidia also deals in cloud services, service delivery, solution advisor, solution integration , global system integration, data centres, gaming chips etc.

One user replying to the comment of Market Sentiment said, “Now is the time to realise that NVDA is not SUN and this is not the dot-com bubble. TSLA was trading at current valuations and at 900 P/E a few years back and it’s now at 50 P/E.”

Another user supporting the post said, “ Remarkable to see NVIDIA’s trajectory, trading at 37x its revenue! A timely reminder of McNealy’s dot-com era wisdom.”

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