Nothing to worry about here -- Nvidia edition

As this chart dramatically illustrates, the story of Nvidia is the story of the AI bubble. This is a 32-year-old company which, up until 5 years ago, never traded at more than $6.50 a share.

While a price-to-earnings ratio of 50 is nowhere near the eye-popping excess of a Tesla or a Palantir, it’s not small either. It suggests the market believes the company is on track for substantial growth in the next 5 to 10 years.

That P/E ratio reflects the astounding rivers of money that are being poured into data centers by companies like Microsoft and Meta. If that level of spending has plateaued—or, worse yet, peaked—Nvidia is substantially overvalued. If the current push for AI is a bubble and we see a substantial rollback in capital expenditures combined with a more conservative consensus on the company’s growth potential, it’s not difficult to imagine the stock dropping by a factor of two or more. 

 And a big drop in this stock has even bigger implications for the wider market and the economy.

 

From the invaluable Allison Morrow's newsletter (I love that monopoly disclaimer): 

Here are some of the reasons people are beginning to worry about the Nvidia story.

 

Reason No. 1: Nvidia is huge. But not just, like, “Oh, it’s a big company!” It is bigger, in terms of market value, than any public company ever. We often toss around its market capitalization — $4 trillion — as if that number makes any sense.

Consider that the world had never seen a $1 trillion public company until Apple crossed the threshold in 2018. Now we have nearly a dozen, almost all of them in the American tech sector.

 

Reason No. 1(a): That size makes Nvidia (pronounced in-vid-ee-uh) on its own account for 8% of the S&P 500. So, even if you don’t hold Nvidia shares, you gotta watch its results because they could swing the entire market. Zoom out even further: Nvidia’s market cap accounts for 3.6% of global GDP, according to Deutsche Bank. Yes. One single company, which gets half its revenue from just three customers, is that huge.

 

Reason No. 2: When we talk about the AI industry, we’re mostly talking about Nvidia. If you use ChatGPT, that’s powered by Nvidia chips. The same goes for Anthropic’s Claude, Google’s Gemini, Amazon’s…whatever Amazon’s chatbot is called — all of those products are powered by the processors made by this company that up until a few years ago was just a tech workhorse churning out processors that make video games look cooler.

 

(You may be thinking, Hey, Nvidia sounds kinda like a monopoly, to which I say, Please do not use the m-word around here, or else I’ll have to call the lawyers. Let’s just say Nvidia almost exclusively controls the supply of vital resources to an entire industry and enjoys monopoly-esque profit margins.)

 

So, if you follow the Gospel of AI and believe that the technology has the power to dismantle the entire global economy, Nvidia is your clear picks-and-shovels play. 

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But — and here’s why the focus on Nvidia is getting even more intense — what if the technology Nvidia is powering turns out to be, I dunno, not quite the revolution that your Sams Altman or Darios Amodei have promised? What happens to the picks and shovels when the gold rush goes bust?

If you want to delve further into the different ways a next-big-thing can under-perform, we've got a couple of metaphors for you here.