Has NVidia gotten a bit rich?
Short term probably not, long term almost certainly
NVidia’s (NVDA) rocket like rise to a US$2 trillion valuation left many breathless and left famed investor Michael Burry smarting from his short on the stock. When you are alone in a market and demand outstrips supply by a wide margin, you can charge pretty well whatever you want from customers desperate to put some substance behind their claims that Artificial Intelligence (AI) is a foundation of their business model. Selling single chipsets for US$30,000 to US$100,000 each feels great, likely not as great for the fab that supplies those chipsets, in this case Taiwan Semiconductor (TSMC), who has to be satisfied with its conventional margins about half of those enjoyed by NVidia.
It may seem like NVidia is an overnight success but it is seven years since the company decided to go “all in” on development of a chip specifically designed for the nascent AI surge. That far-sighted move is paying off big time today, and NVidia investors are enjoying their day in the sun.
Will the rocket ride reach the moon? It certainly seems unstoppable right now, but valuations that are nosebleed multiples of (choose your metric) earnings, sales, EBITDA, etc. rarely last in free markets and customers can tout their AI prowess by using NVidia chips today but will race to find alternatives.
And they are.
Amazon.com (AMZN), Microsoft (MSFT), Google (GOOG), Oracle (ORCL) and Meta (META) are all working on their own AI chip desings, and rival Advanced Micro Devices (AMD) is advancing its already popular MI300 GPU and working feverishly to produce a GPU that will perform as well as the NVidia chips in processing large language models. Microsoft has reportedly decided to work with long-time partner Intel (INTC) on its AI chip program.
The world has long since learned that China’s “One China” policy is a public statement that they will assimilate Taiwan as a part of China (they already say it is one) by negotiation or by military force, and TSMC may become less reliable as a supplier to an American company if it comes under Chinese government rule while American President’s and President hopefuls can’t make a speech without decrying the Chinese government. A Chinese takeover of Taiwan and with it TSMC may prompt a different kind of gold rush - one to find a domestic American supplier of the chips designed by NVidia and its rivals. There aren’t that many candidates and my guess is that Intel will become a major beneficiary, although that may take a few years to materialize just like NVidia’s move to design and sell AI chips took that long.
The AI hype has Wall Street agog, but most have no idea what it actually means since everyone is claiming to have AI based businesses and trying to promote their stock with claims they use AI for everything from developing the next generation of cancer drugs to improving internet search (I presume they think putting leftist ideology into the search results is an improvement, just as Google is programming its AI bot Gemini to put DEI and CRT into its image creation of historical figures with a Black Pope, a Black Jesus, and a Black populated White House at the time of the war of independence). Here’s a clip of the Gemini created Black Pope, and I have to admit if the Roman Catholic Church ever had a Pope as handsome as the Gemini image the Church may even be able to persuade people the Pope speaks to God on his iPhone.
From an investment perspective, betting on NVidia at today’s prices is a dangerous game, and should be confined to traders with the ability to withstand major losses. Betting on a stock at 66 times earnings and 32 times sales is not for the faint of heart.
With the wind at its back and no competition for at least a number of quarters, the stage is set for NVidia to continue to impress investors and I will watch from the sidelines, unwilling to expose myself to the likely volatility and risks of loss for the prospect of trading gains.
You mention Burry's short: David Berman was on BNN (it was a repeat program on the weekend - no idea when it first aired) and he mentioned that he was stinging from having shorted NVDA at $650.
Michael is giving investment advice on something he knows little about.
https://www.youtube.com/watch?v=SwqauPHzIs0