Nvidia is nuts, when’s the crash?

Before the AI fever breaks few will bet against Nvidia’s market value rising further as stock market investors swoon at thoughts of the bot-overlord future.

This week Nvidia’s market cap passed the $1.8tn mark, leapfrogging Alphabet — whose 2023 net income was greater than Nvidia’s 2023 revenues — to become the third most valuable US company after Microsoft and Apple. Nvidia options have gone wild — Tesla wild.

Nvidia’s chips are essential to the current generation of machine learning models and their associated services, and so will earn the company extraordinary profits for the foreseeable future. That seems to be the general idea at least. Pour cold water over it at your peril.

Allow us instead to merely pass on a few back-of-the-envelope calculations about what that valuation implies from the tech-focused curmudgeons over at Chameleon Capital.

Toby Clothier has pulled a dusty discounted cash flow model from a drawer and plugged in Nvidia’s numbers. To get to a $740 share price simply requires that the company maintain a monopolist-like operating profit margin of 55 per cent for the next decade, while also growing sales tenfold, from $60bn a year to more than $600bn.

For context, the entire industry sold $527bn worth of chips last year, according to the the Semiconductor Industry Association.

Over the past decade Nvidia did admittedly achieve a similar level of growth: in 2014 its sales were a mere $4bn. However, Clothier points out that Nvidia’s unusual profitability is a recent phenomenon related to the very high prices pushed through in response to overwhelming demand:

The EBIT Margins were all over the place from 2014-2023 (range of 12-37 per cent) and certainly nowhere near a steady 55 per cent.

So Nvidia shareholders are making a bet that the law of large numbers does not apply, and that competition, innovation, and pricing pressure will not come to bear until at least the mid-2030s. Good to know.

Clothier’s discount rate is 10 per cent by the way. At a 15 per cent growth rate and 30 per cent sustainable margins his antiquated model cranks out a share price of $176 — purely as an example for discussion, not a target.

Those who have made a fortune from Nvidia are very welcome to share their own assumptions in the comments.

Further reading:
This is nuts, when’s the crash?
Nikola is nuts, when’s the crash?
Tesla is nuts, will it ever crash?