KUALA LUMPUR, July 29 (Bernama) -- Bursa Malaysia rebounded to close higher on Wednesday on selective buying of defensive stocks after a volatile trading session. IPPFA Sdn Bhd director of investment strategy and country economist Mohd Sedek Jantan said consumer products and services stocks lifted the key index higher, overcoming lingering geopolitical concerns. At 5 pm, the FTSE Bursa Malaysia KLCI (FBM KLCI) rose 3.08 points to 1,715.56 from yesterday’s close of 1,712.48. The benchmark index, which opened 1.91 points higher at 1,714.39, moved between 1,710.79 and 1,720.59 during the day’s trading. In the broader market, gainers outstripped decliners 550 to 476, while 612 counters were unchanged, 1,129 untraded, and 48 suspended. Turnover rose to 2.96 billion units valued at RM2.48 billion from 2.94 billion units valued at RM2.56 billion on Tuesday.
NVIDIA Corporation (NASDAQ: NVDA) continues its upward trajectory, propelled by the buzz around generative AI, its strong market position, and consistent performance exceeding expectations. This growth has led some to draw parallels with Cisco during the Dot-Com bubble, yet these comparisons often lack the necessary context. So, is NVIDIA in a stock bubble, or is it on a sustainable growth path? Let's dive into the details.
Why NVIDIA Stock Keeps Climbing
In my previous analysis of NVIDIA, I highlighted that despite the stock's significant rise, its quality and expected performance justified its premium price. Since then, NVIDIA's stock has surged by nearly 50%, briefly becoming the world's most valuable company. What fuels this ongoing ascent?
Three primary factors contribute to NVIDIA's rise:
- Generative AI Sentiment: The excitement around AI, particularly generative AI, has been the backbone of the market's recent performance.
- Market Position: NVIDIA's formidable position in the market ensures it continues to lead the AI race.
- Exceeding Expectations: NVIDIA has consistently outperformed market expectations, maintaining an impressive streak of quarterly earnings beats.
Generative AI: The Backbone of NVIDIA's Growth
Generative AI has been a significant driver of market strength, with NVIDIA at the forefront. This enthusiasm is evident in the stock's performance and the broader market's reliance on a few mega-cap tech companies leading the AI revolution.
NVIDIA CEO Jensen Huang has been instrumental in stoking this excitement, likening the AI revolution to a new industrial revolution. According to Huang, AI will bring substantial productivity gains and transform industries, further solidifying NVIDIA's market leadership.
Market Position and Performance
NVIDIA's market position remains robust. The company has consistently exceeded expectations, with its latest quarterly results showcasing significant growth in data center revenue and profitability. Despite a strong performance with older products like the H100 GPU, NVIDIA continues to innovate, recently launching the Blackwell superchip.
Is NVIDIA in a Bubble?
A stock bubble occurs when a stock's price significantly exceeds its fundamental value. While some compare NVIDIA to Cisco during the Dot-Com bubble, this comparison overlooks critical differences in their fundamentals. Unlike Cisco, NVIDIA's growth in earnings per share (EPS) and free cash flow per share has closely tracked its stock price over the past three years.
Demand Bubble Risks
Despite not being in a stock bubble, NVIDIA may face risks related to a demand bubble. The global AI market is expected to reach over $800 billion by 2030, with NVIDIA projecting a long-term addressable market of $1 trillion. However, meeting these high expectations could be challenging, especially with analysts predicting more moderate growth rates for NVIDIA in the coming years.
Competitive Pressures and Market Saturation
NVIDIA's reliance on major tech companies like Microsoft, Meta, Amazon, and Google for a significant portion of its revenue poses a risk. These companies are also investing in internal AI capabilities, potentially reducing their dependence on NVIDIA. Additionally, competition from companies like Advanced Micro Devices (AMD) and Intel could impact NVIDIA's market share.
Another risk is the potential saturation of the AI chip market. As data centers are built out, the demand for high-powered GPUs may decrease, leading to potential oversupply issues.
Expected Value and Market Expectations
To justify its current stock price, NVIDIA would need to maintain a 45% annual revenue growth and a 50% operating margin for the next six years. This translates to $740 billion in revenues by 2030, a substantial portion of the projected global AI market. Given NVIDIA's current size, these expectations are ambitious.
Should You Invest in NVIDIA?
While NVIDIA's potential in the AI market is undeniable, its high valuation and associated risks make it a hold rather than a buy. The company's stock price reflects sky-high expectations, and any deviation from these expectations could result in significant price corrections.
Conclusion
NVIDIA remains a dominant player in the AI and GPU markets, with a strong track record of performance and innovation. However, the current valuation and potential risks suggest that caution is warranted. Investors should weigh the high expectations against the growing risks before deciding to invest in NVIDIA at its current price.
For those considering an investment in NVIDIA, it may be prudent to wait for a more favorable entry point. While betting against NVIDIA is risky given its momentum and market position, paying too high a price for even a great company can lead to suboptimal investment outcomes.
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