The Nvidia (NVDA) Stock Bubble Is About to Pop

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NVDA stock - The Nvidia (NVDA) Stock Bubble Is About to Pop

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I need to start here with an apology. I like NVIDIA Corporation (NASDAQ:NVDA). I like it very much. I like its products, I like its positioning. CEO Jen-Hsun Huang can call himself Jensen or Jerry or Jo-Jo, but if I met him and his leather jacket on the street, I’d still give him a hug or a high-five. But I’m not putting a dollar of my investment money into NVDA stock right now.

The price has become ridiculous, and Wednesday’s action feels ominous.

Chip companies don’t have price-to-earnings ratios of 45. They’re not worth 12 times sales. They don’t blow past the price target of a bull like our Tim Biggam and just keep going.

At least they don’t in a rational market.

This may be the point. When it comes to technology leaders, this may no longer be a rational market, and this should be a danger sign for NVDA stock longs, sure … but also for all investors, regardless of where their money goes now.

Nvidia Is Bubblicious

NVIDIA is a good company that has been given a bubble valuation.

Don’t get me wrong: Its first quarter was spectacular. Revenues of $1.937 billion against revenues of $1.305 billion a year earlier. Profits of $507 million against $196 million a year ago. NVIDIA’s debt load is dropping, and operating cash flow is skyrocketing.

NVDA is in the sweet spot of the market. Its GeForce graphics line is not just where you want to be for gaming, but for autonomous driving and artificial intelligence as well. Graphics chips are transforming the cloud, augmenting the low-cost silicon muscle they now contain with fast twitch muscle to deliver instantaneous calculation. In every hot area of silicon, NVIDIA is a leading player.

But speculative things can happen to good companies, not just bad ones. Some of the dot-com stocks of 1999 were good investments, notably Amazon.com, Inc. (NASDAQ:AMZN). But even Amazon took nearly a decade to reach that 1999 high again.

When the bubble pops, it pops for everyone.

Nvidia Corporation (NVDA)

A lot of traders are going to defend today’s parabolic valuations for NVIDIA, Amazon and other leading Internet brands because they’re leaders. Yes, Alphabet Inc (NASDAQ:GOOGL) is a leader, and Facebook Inc (NASDAQ:FB) is a leader, and even Weibo Corp (ADR) (NASDAQ:WB) is a leader in its field. But prices will fluctuate, they will go down for good assets as well as bad ones.

I have seen this movie before. It does not end well.

NVDA Stock Will Survive, But …

While I would not pay $136 per share for NVIDIA today, and I would be inclined to sell my stake if I had one, that does not mean the company has no future.

Deep learning, through clouds, means there is a large and growing market for faster chips in data centers. In 10 years, NVDA stock may well justify today’s confidence. Self-driving cars will become a thing, although how many and how fast is open to conjecture.

But when markets like the current one fall, they fall spectacularly, dropping even faster than they rose. The bottom drops out all at once and only those with a fiber link to a very close trading platform get out comfortably.

The rest of us, especially the small investors, are left to count our losses and lick our wounds.

Hot markets are great fun for traders, especially those on truly competitive trading platforms. This is not a game a small investor can afford to play. I am perfectly willing to buy NVIDIA stock, and recommend it, at a reasonable valuation.

That valuation would be much higher than Intel Corporation (NASDAQ:INTC) and its 15 times earnings. It would be better than Qualcomm, Inc. (NASDAQ:QCOM), which sells at 18 times earnings. It would even be higher than Texas Instruments Incorporated (NASDAQ:TXN), at 21 times earnings.

Just not 45 times earnings. When you overpay for anything, you’re asking for trouble.

Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, FB, GOOGL and INTC.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/nvidia-corporation-nvda-stock-bubble-is-about-to-pop/.

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