The Magnificent Seven to The Magnificent One
In 2024, which obviously is just half over, Nvidia is already up 156%— so on an annualized basis this makes last year's outrageous performance actually look a little slow. It's now effectively in a 3-way tie for the world's most valuable public company with Microsoft and Apple, two massive businesses which are older, more established, operate in more countries, and have many more lines of revenue. Can Nvidia possibly keep up this kind of valuation growth?
I mentioned last week that I own Nvidia stock and have been selling it down to diversify. But I'm literally not keeping up: currently my NVDA position is 1.6x my next-largest holding (Microsoft). It's growing too fast to manage.
Boo-hoo, you say, champagne problems. You're right! But it also means I'm not sleeping as well and since a portfolio should build both wealth and health, I need to manage better.
Video of the event here: Huang isn't sure its a great idea to sign this particular autograph
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It's an incredibly unusual situation. Of course there are large established companies whose valuations rise enormously in short time frame. But they tend to fall into two categories: meme stocks, which are wildly volatile in part because those huge moves are not based on foreseeable business fundamentals like growth or profitability (GameStop 2021-2023, AMC Entertainment 2021-2022); or they are businesses with huge competitive wins in the real world marketplace, and they generally fall off soon after because investors decide the sudden growth was unsustainable (Moderna 2021-2022).
What's particularly crazy about the Nvidia story today is that until the last couple of months, its profitability kept up with its stock surge. Meaning, the stock price was justified all along based on the business's sales and profit margins. A strong component of those profits however is outsized demand: the company literally cannot keep up with the orders of its customers, and no one else makes chips as capable. So effectively, deep-pocketed customers are competing for whatever chips Nvidia can produce, driving up prices. Nvidia is busily adding manufacturing capacity by building new plants, and many of its best customers— other members of 'big tech'— are racing to produce their own super-chips rather than pay for Nvidia's. All of which is to say, Nvidia is wearing a huge target. How long can the company outrun the wealthiest and most powerful players on earth?
If we poke gently into the actual numbers around the business: at 45 times the next 12 months' earnings, the stock is 11% pricier than its average multiple over the last 5 years. It's 35% more expensive than it was just in March on that basis. And Nvidia at this price has only 20% of the trailing 12-month free cash flow of Apple, perhaps the most-studied company in big tech and seen generally as a decent value today. That looks like froth.
This can't go on forever. At some point, the company will trip, on its own shoelaces or due to the extended ankle of a cunning competitor. Perhaps they'll release a line of dud products and the stock will collapse with reduced demand. Or Amazon or Microsoft will show up with something better— or even something similar that's far more affordable. Or AI could turn out to be less astonishing and game-changing than we thought. Or maybe investors will all already own enough of the stock, so today's prices can't be supported.
For now I'll let it continue to dominate in my portfolio. But I'm going to keep selling it down a little at a time for peace of mind.
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