Nvidia gains $100 billion in market cap after earnings (2024)

“We are in an AI bubble,” says Joshi Fortune. “Some of the results have surprised us.”

Few stocks embodied that surprise factor like $1.7 trillion AI chip giant Nvidia, which reported results on Wednesday, completely beating analysts’ expectations. The chipmaker, dubbed “the hottest stock on planet Earth” by a Goldman Sachs analyst, reported revenue of $22.1 billion during the latest quarter, compared with a forecast of $20.6 billion. . Revenue from the company’s data center chips, used in AI models and generative AI applications, reflected higher demand and reached $18.4 billion, up 27% from the third quarter and 409% from the third quarter. compared to last year. Share prices rose 7% in post-market trading, adding more than $100 billion in value.

“Accelerated computing and generative AI have reached an inflection point,” Nvidia founder and CEO Jensen Huang said in a press release. “Demand is increasing around the world in companies, industries and countries.”

While Joshi did not comment specifically on Nvidia, its excellent results can be seen as evidence for his case.

The technology sector is trading at a 75% premium to the global stock market, according to Joshi’s calculations in an analyst note published last week. Its blistering growth became the backbone on which much of the rest of the US stock market’s growth was built and propelled the Nasdaq to near-record highs last year, just 6.5% off its all-time high in November. in 2021. In 2023, the so-called Magnificent Seven, comprising Nvidia, Apple, Microsoft, Alphabet, Meta, Amazon and Tesla, contributed two-thirds of the S&P 500’s total market gains.

And while those gains are impressive and rewarding for smart investors, they are unsustainable, according to Joshi.

Unlike Nvidia, some companies will not be able to live up to the high expectations set by the market. That could spell trouble because valuations and stock prices are often measured based on expectations as much as actual results. If the major technology companies that account for much of the sector’s (and the economy’s) growth fail to meet analyst expectations, they could drag others down with them. While he warns against underestimating AI as a whole, Joshi believes the market is overvaluing the productivity growth derived from the new technology. And when new innovations don’t live up to those expectations, the market will punish the companies that made them.

“Because this handful of stocks have become such a huge percentage of the market cap, any disappointment will mathematically have an impact on the overall index,” Joshi says.

For the US tech sector to avoid bubble territory, it would have to continue trading at a 10% premium to the market, a scenario Joshi considers unlikely.

Joshi doesn’t blame the market for valuing tech companies so highly. In fact, they have proven themselves over the past 10 years by achieving stellar results time and time again. Over the past decade, shares of major technology companies have soared. For example, since February 2014, Nvidia shares have risen 14,927%, Microsoft shares have risen 964%, and Apple shares have risen 875%. The numbers pale in comparison to the still solid 163% the S&P 500 gained over the past 10 years. Although he doesn’t see this continuing, he says it’s rational for the market to continue pricing in more explosive growth in technology.

“If you achieve very strong profit growth, for one or two years, the market sees it differently: ‘This can’t be sustained.’ So, if anything, you give it a low valuation, because you say these are abnormally high profits. But if the market sees 10 years of outstanding performance, it no longer considers those results abnormal and expects them in perpetuity, Joshi says.

For Joshi, however, the last 10 years of spectacular earnings growth were, in fact, abnormal. Largely because most of that growth was a result of the network effect, which allowed a select few companies to increase their size and effectively gain control of a market. Amazon captured the online shopping market, Google did the same with search, and Meta cornered the online communication market, Joshi writes in his note.

“Once you have networks, you have winners and losers,” he says. “Those winners become natural monopolies, and if you are a natural monopoly, then you are in a very strong position to increase your profits.”

Without a clear indication that the network effect will carry over to the world of AI, those companies will not have the same dominant position, Joshi maintains. “The market is saying, ‘Hey, the baton will now pass to generative AI and that trend will continue for the next five to 10 years.’ “I’m very cynical about it because there is no network effect in generative AI.”

There is a chance that some especially popular AI tools could see a network effect if they attract more users because they will be able to train themselves on all the tasks they are asked to perform.

Even without AI, it appears that the benefits of the network effect could be reduced in the near future due to pressure from elected officials to regulate Big Tech. “The Web 2.0 revolution has reached its limits due to consumer backlash and much stricter regulation of what data can be collected and how it can be used.”

In Europe, the EU has already passed several landmark laws aimed at dismantling some of the powers that tech giants like Apple and Alphabet already had in the market. While in the United States, despite no national privacy law, there is an unprecedented level of public and bipartisan support for a series of new laws that would limit the amount and type of data that technology companies can collect about the users.

But despite the obstacles Joshi sees on the horizon for technology, he doesn’t anticipate the entire sector collapsing like it did during the dot-com crisis. In fact, it will continue to outperform the broader market, just at a slower pace. That could still mean tough losses for investors, especially as the market eventually readjusts for a technology sector that no longer offers hundredfold returns.

To be sure, whether or not the market is in the middle of an AI bubble is still hotly debated. Joshi isn’t the only one who thinks one exists. Morgan Stanley warned against rushing headlong into AI, lest investors have adequate groundwork before the bubble bursts. Meanwhile, Goldman Sachs and others argue that rising yields are not a bubble, but simply the market rewarding the future of technology.

As for what investors should do to mitigate the risks of a potential AI bubble, Joshi has simple advice: invest in other parts of the market, such as healthcare and luxury goods.