Just a week ago, Nvidia became the most valuable company in the world.
The chip maker – whose shares have risen ninefold since the end of 2022 – overtook Microsoft its stock market valuation reached $3.34 trillion (£2.63 billion).
Since then, the stock has fallen 13% and is down in each of the last three trading sessions.
That was enough to cut more than $500bn (£394bn) out of it. Nvidia stock market valuation hit when the shares hit an all-time intraday high of $140.76 (£110.94) each last Thursday (taking into account the 10-for-one stock split completed earlier this month).
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To put that into context, Exxon Mobil—the 14th largest company in the S&P 500 and itself one of only a dozen companies ever to achieve the status of the world’s most valuable company—has a market capitalization of $511 billion.
So what’s up?
There are a number of factors at play.
The first is profit taking. Nvidia stock had enjoyed a fantastic run before last Thursday, attracting a lot of hot money from so-called “momentum buyers” who see the stock moving higher and jump on board to profit from the ride.
It was natural for such buyers to lock in the profit by selling.
Added to this, speculative money has moved on. A report in the Wall Street Journal over the weekend that Meta Platforms, the parent company of Facebook, was in talks with Apple to integrate Meta’s generative AI model into the recently unveiled Apple Intelligence system sent shares of both higher on gains from Nvidia’s recent strong growth. were recycled.
Last week: Nvidia overtakes Microsoft
This money did not leave the market – it was simply moved from Nvidia to other stocks, not only Meta and Apple, but elsewhere.
This can be evidenced by the fact that the selloff in Nvidia, while dragging down peers such as Broadcom, Taiwan Semiconductor and Super Micro Computer (a server maker that is a big buyer of Nvidia chips), did not lead to a broader selloff.
The Dow Jones, admittedly not as good a barometer of the U.S. stock market as the S&P 500, hit a one-month high on Monday, even as the S&P 500 and the Nasdaq, which has a higher weighting in Nvidia, fell.
Also contributing to the sell-off was the revelation – via a filing with the main US financial regulator, the Securities and Exchange Commission – that Jensen Huang, Nvidia’s founder and chief executive, had used a recent rally in the stock price to reduce his holdings.
Mr Huang, who founded Nvidia in 1993, sold shares worth just under $95m (£74.9m) between Thursday 13 June and Friday 21 June. Nor is Mr Huang – who still owns more than 866 million Nvidia shares worth $102.3bn (£80.3bn) at Monday night’s closing price – the only executive to sell recently.
Mark Stevens, a veteran venture capitalist who has been on Nvidia’s board since 2008, unloaded shares worth $28m (£22m) this month, while Tench Coxe, another VC who was one of Mr Huang’s early backers and who was on the board has sold $119.5m (£94.1m) since the start.
Directors’ sales are not always a reliable guide to a company’s prospects. Sometimes it reflects personal factors, such as divorce or estate planning, rather than showing what the director thinks about the company’s prospects. Rightly or wrongly, however, it is usually taken as a negative signal.
Perhaps the most significant factor in the selloff, however, is that some investors have been looking at Nvidia through traditional investment metrics.
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The main one is the price/earnings (P/E) ratio. The higher the P/E ratio, the more expensive the stock is valued at.
Last week, after recent gains, Nvidia stock traded hands at 45 times expected earnings.
To put that into context, the forward P/E of the S&P 500 is 22 times higher and the Nasdaq is only slightly more. Put another way, investors were assigning more than double the value of Nvidia’s future earnings to its peers.
Moreover, as the influential investment magazine Barron’s pointed out over the weekend, Nvidia has been valued at around 20 times expected sales for the year to the end of January 2026 – a noble valuation to say the least.
A stock with this kind of valuation needs to justify it with spectacular earnings growth.
Still, as Barron’s columnist Eric Savitz pointed out, Nvidia’s quarter-over-quarter earnings growth has slowed from 88% to 34% to 22% to 18% over the past four quarters. Now, 18% quarter-on-quarter earnings growth is still pretty spectacular. But that doesn’t quite justify the price-to-earnings multiple, which has changed from 25 to 45 over the past year.
Pointing out that from 1976 to 2020, stocks trading at a P/E ratio of more than 15 have underperformed, Mr. Savitz added: “I know what you’re thinking. This time it’s different. This is AI! And sure, maybe AI really is the most important thing to happen in technology since cloud computing, the internet, mobile phones or even personal computers, but the numbers worry me.
“Nvidia’s market value is now nearly five times the industry estimate for global chip sales next year — yes, the total from all companies worldwide. Microsoft has seven times more employees than Nvidia and double the revenue. Apple has five times more employees and triple the sales However, last week Nvidia’s market cap swung over both.”
Mr. Savitz was not the only investment commentator to suggest that Nvidia’s stock might be overvalued.
Part of Monday’s selloff was also fueled by the Wall Street Journal’s highly influential “Heard it on the Street” column, which over the weekend urged readers to cast their minds back to the dot-com bubble at the turn of the century. and in particular to the swings experienced in Cisco Systems stock at that time.
Cisco, he reminded Journal readers, was favored along with stocks like IBM, Lucent and Intel — companies whose hardware was at the forefront of connecting homes and businesses to the Internet. By the end of 1999, it had become the most valuable company in the world.
Comparisons with Cisco have undoubtedly dented sentiment toward Nvidia in some quarters.
Noting that Cisco is valued at 40% less today than it was then, the Journal pointed out that at its peak in March 2000, Cisco stock was valued at 131 times forward earnings despite a less impressive financial performance than it has recently shown. Nvidia.
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Emphasizing that Nvidia wasn’t as frothily valued as Cisco, the column added: “But that doesn’t necessarily mean Nvidia shares are safe at their current levels.
“The stock has seen a large influx of individual investors since the company’s last financial results last month. Daily retail inflows have averaged nearly $141 million since earnings, compared with a daily average of about $39 million during the previous month, according to Vanda Research.
“Sell-side analysts are also somewhat bullish. Several of them have raised their price targets since the June 10 stock split. And at least four of those targets are now at $160 and above, which would bring Nvidia’s market cap closer to $4 trillion. current number of shares.
“Nvidia may be AI’s best weapon, but investors should be careful not to write checks the stock can’t cash.”
Exactly.
Artificial intelligence is still an emerging technology, and it is impossible to tell from here who may be the biggest winner over time.
Just as investors in 1999 trying to predict who would be the world’s biggest winner from the widespread adoption of the Internet could not have known.