If hype is measured in values from 1 to 10, Nvidia (NASDAQ:NVDA) stock is at 11. The metaverse, a combination of artificial intelligence and virtual reality around which Facebook is rebuilding as Meta Platforms (NASDAQ:FB), is behind the latest move in Nvidia stock. Just since early October, NVDA is up nearly 50%. Shares are up 20% just since the Meta name change was announced.
While Nvidia is a great company, and I own shares in it, its valuation is now divorced from reality.
Before you join the rush to buy, at least know what you’re buying.
Nvidia is Software
Nvidia is usually called a hardware company, which makes semiconductor chips for graphics and related applications. In fact, it’s a software company that produces chip designs fabricated by Taiwan Semiconductor (NYSE:TSM). It’s in the process of buying ARM Holdings from Softbank
In the metaverse, Nvidia is offering a full stack of software, including language models and avatars. It’s expanding its Launchpad program to help partners use the tools. All this was described at a virtual Nvidia conference before 200,000 researchers, hosted by CEO Jensen Huang.
Huang, whose dark shirts and leather jackets have become as fashionable as Steve Jobs’ turtlenecks were early in the century, is aiming at all the hot verticals, from healthcare to robotics, offering both hardware and software. Huang, who co-founded Nvidia in 1993, is now worth of almost $28 billion.
The Posse for NVDA Stock
For those who want to buy the metaverse, Nvidia is an obvious name to play, however, its success has analysts looking elsewhere. Some are looking at Advanced Micro Devices (NASDAQ:AMD), which is now up 59% so far in 2021. AMD acts as “little brother” to Nvidia in graphics, as it once did to Intel in microprocessors.
Others are looking to networking, or storage, expecting that success for the metaverse will increase demand for all Internet-related gear. Then there’s Intel itself, which has yet to gain traction, and Apple, which is also designing its own chips based on ARM designs.
Nvidia is open to other chip makers using its proprietary CUDA toolkit. This may be your best clue to what’s going on. As I have said many times, hardware is now software, and if you’re following someone else’s compatibility specs like Microsoft (NASDAQ:MSFT) Windows OEM, then you’re going to be a follower.
The Bottom Line
Look instead at the video game business, with companies like Roblox (NASDAQ:RBLX), Unity Software (NYSE:U), and privately held Epic Games. Both the publicly traded companies are now worth over $50 billion, despite doing around $1 billion in business.
The concepts are simple, building immersive and interactive worlds like video games, but with real world applications like health care. As with other technology innovations, money flows long before products hit shelves.
What investors want, however, is a “can’t miss play,” and that’s why Nvidia stock is so hot right now. It’s offering the software that runs chips and runs computers on which the metaverse will be built, and even the application stack.
The variable is time. It will take time for the metaverse to emerge, and for us to know what it is. At that point, Nvidia’s valuation will settle into a new normal. Until then, it’s on fire.
On the date of publication, Dana Blankenhorn held a long position in NVDA, AAPL, MSFT, TSM and INTC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. Just in time for the holidays he has a collection of COVID-19 stories at the Amazon Kindle store. Write him at firstname.lastname@example.org or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.