I bristle every time I hear the words Nvidia is a bubble stock. Just like in Scott Galloway’s recent post https://www.profgalloway.com/bubble-ai/. I generally am aligned Scott’s view, but on this one he’s drinking too much of Aswath Damodaran’s bath water. These two are speaking of things they appear to have little understanding of.
So what defines a bubble?
A stock bubble is generally understood as a run-up in stock price without a corresponding increase in the value of the businesses. A company's valuation should be determined by fundamentals — its margins, profits, growth rate — the quality of earnings. In bubble stocks speculation and euphoria take over but there are no underlying fundamentals. Just like GME, or Tulips in the 1600s. It was the greater fool theory, everyone thought they could sell GME or prized Tulip bulbs at a price higher than they paid.
I appreciate why people think Nvidia is in a bubble: There is hype and misunderstanding about AI every where you look, and it’s compounded by ignorant reporters or thought leaders. And Nvidia has also been a poster-child of previous boom/bust cycles as we know from the crypto gluts in 2018 and 2021. And, when confronted with some data, one regularly hears a sarcastically delivered, “sure, it’s different this time.”
To which I reply, just look at the quality of earnings. It IS different. No technology company has ever grown so quickly, at such scale and so profitably. In order for the hype theory to hold, you have to believe Nvidia is fooling the entire business world into believing the output of their chips are meaningless nonsense. But the largest companies in the world and significant government and research institutes are lined up for months to buy them.
Jensen Huang actually did build a better mouse trap.
Semiconductors generally lead the broader US economy. They are the primary asset in a long chain of economic activity.
What is so unusual about this cycle is that there is one primarily beneficiary. It’s baffling to watch the slow-motion development of the machine learning market since 2012 only to have it explode 2024, and not one of the other merchant semiconductor suppliers (Intel, AMD, Qualcomm, Marvell, Broadcom, Mediatek) nor the plethora of startups (Graphcore, Nirvana, Cerebrus, Mythic, Habana, SambaNova, Groq, Tenstorrent) nor huge technology giants like Google, Microsoft, Apple, Meta, Tencent, Alibaba, and Amazon can participate at a similar scale as Nvidia.
Nvidia has invented and is delivering a new kind of computing solution. And that solution will be refashioned to reshape business and economic opportunity for decades to come. And that will result in the simple creation of new gross domestic product: where there once was nothing, there is now something.
NVDA is not a bubble, their earnings prove it.
