Good news: Nvidia’s record-breaking results. Bad news: a stock market crash could still happen
There seems to be lots of speculation among investors at the moment as to whether a stock market crash is looming. Many believe there are similarities between the current enthusiasm for all-things artificial intelligence (AI) and the bursting of the dotcom bubble in 2000.
And as the manufacturer of the semiconductors that underpin the AI industry, Nvidia (NASDAQ:NVDA) is seen as a barometer for the health of the sector and for the stock market in general.
Thatâs why all eyes were on the groupâs earnings update last Wednesday (19 November). Prior to publication, there appeared to be a widely-held view that if Nvidiaâs revenue or profit showed any sign of a slowdown — or fell significantly short of analystsâ expectations — then this would lead to a stock market crash or, as a bare minimum, a market correction.
The world’s most valuable company
Fortunately, the group did better than expected. Revenue for three months to 31 October was 62% higher than for the previous quarter. And its earnings per share was 3.2% above what analysts were forecasting.
But given the amount being spent on AI â and the need for an ever-increasing number of chips â this doesnât surprise me. The groupâs boss said: “There’s been a lot of talk about an AI bubble. From our vantage point, we see something very different.â
Investors now value the group at close to $4.5trn (£3.4trn). Expressed another way, itâs worth 16 AstraZenecaâs. In fact, itâs valued at over 40% more than the entire FTSE 100.
Cheap as… chips?
Despite this, I donât think Nvidiaâs over-valued. And leaving Tesla to one side, the rest of the Magnificent 7 arenât badly priced either.
Over the past four quarters, the chip makerâs reported earnings per share of $4.03. Although its stock isnât cheap, I think a price-to-earnings ratio of around 45 is justified given its impressive growth.
Of course, it canât continue like this forever. Restrictions on exports to China are a major problem and could enable a competitor to get a foothold in the market.
And donât get me wrong, thereâs likely to be a sharp correction in its share price if (when?) its earnings begin to slow. But after a while, it will probably start to recover again. This reflects the typical ebb and flow of stocks and shares.
Nvidia’s clearly the market leader in its field and its Blackwell chip is setting new standards for processing power. Thatâs why, despite its generous valuation, I still think the stockâs worth considering.
Final thoughts
But I don’t think Nvidia’s market cap is really the issue when it comes to determining whether thereâs an impending stock market crash.
Instead, there are plenty of examples of other companies that are attracting huge valuations on the back of little more than hope. This concerns me greatly. If investors lose confidence in these (which, in my opinion, is highly likely) then we will see a stock market crash.
But this would be nothing new. Apparently, there have been 19 of them over the past 150 years. Clearly, one will come soon.
Despite this, I reckon AIâs here to stay. This means Nvidia will be selling its chips for decades to come, long after plenty of over-hyped companies in the industry â with silly valuations — have gone to the wall.
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James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended AstraZeneca Plc, Nvidia, and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
