To The Moon

$NVIDIA(NVDA)$

Is Nvidia in a Bubble?

Nvidia is undoubtedly one of the most extraordinary stocks in the market today. Over the past five years, its stock has skyrocketed by more than 19,100%, pushing its market capitalization from $165 billion in February 2020 to approximately $3.4 trillion today. This astonishing rise has led many investors to ask a crucial question: Is Nvidia just one massive bubble?

It's a complex issue. Critics point to Nvidia’s price-to-earnings (P/E) ratio, which currently exceeds 50, as evidence of overvaluation. However, the remarkable part is that Nvidia’s quarterly net income has surged from $899 million in Q3 2019 to $19.3 billion in Q3 2024—an 84% compound annual growth rate. This growth is largely driven by its dominance in AI-focused chips, such as the A100 and H100, which have become essential for AI-driven companies.

But recent developments have raised concerns. Reports suggest that China’s latest ChatGPT competitor, DeepSeek R1, was entirely developed on outdated Nvidia hardware at a fraction of the cost of other AI models. Even Nvidia’s most dedicated supporters are beginning to question whether its latest chips are truly indispensable—or if they are starting to resemble 17th-century Holland’s tulip mania.

The Rise of Nvidia

To understand where Nvidia stands today, let's look at its history. Founded in 1993 by Chris Malachowsky, Curtis Priem, and Jensen Huang, the company initially focused on selling graphics cards—primarily to gamers. In 2015, Nvidia generated $5 billion in revenue, with 83% of it coming from GPU sales. For years, that remained the core of its business.

However, in 2020, Nvidia introduced a new revenue segment: Compute & Networking, which included data center revenue. This shift marked the beginning of one of the fastest business expansions ever. As the AI revolution gained momentum, Nvidia's chips became the industry standard.

• In 2020, Compute & Networking contributed 41% of total revenue.

• Today, Data Center revenue alone accounts for 87%, while the traditional GPU segment is declining.

• In its latest quarter, Nvidia’s graphics segment generated just $3.3 billion, representing only 9% of total revenue.

While Nvidia’s business has undeniably grown at an unprecedented rate, its stock price has surged even faster. Consider Nvidia’s valuation trajectory:

• In 2015, its stock was trading at a split-adjusted $0.89.

• By 2020, revenue had more than tripled to $16 billion, yet the stock had risen 15x to $13.30.

• Today, revenue has surged 7x to $113 billion, but the stock has climbed 10x to $140.

This pattern suggests that while Nvidia’s business is expanding, its stock price is rising at an even steeper rate. Investors are willing to pay a P/E ratio of 50, meaning they are betting on 50 years of consistent earnings at current levels just to break even—far above the market’s historical P/E average of 17.

Despite the high valuation, investors are still piling in. Nvidia is one of the most traded stocks, with 81% of transactions being buy orders. Month after month in 2024, it has remained either the #1 or #2 most traded stock on major platforms.

The Verdict: A Future Giant or a Market Bubble?

So, where does Nvidia go from here? Will its AI dominance continue to propel growth, or is its stock price outpacing reality? While Nvidia remains at the forefront of AI hardware, history has shown that no stock can rise indefinitely without corrections. Whether Nvidia is the next trillion-dollar tech giant or a bubble waiting to burst is a question only time will answer.

Is Nvidia Overvalued?

Nvidia’s stock price has surged far beyond what its business performance alone might justify. However, having a price-to-earnings (P/E) ratio above 50 doesn’t necessarily mean the stock is overvalued—because Nvidia is currently growing at an exceptionally fast pace. If the stock price remained constant over the next year, its P/E ratio would naturally decline as earnings continue to rise.

This is why opinions on Nvidia’s valuation are so divided. Some investors believe it’s a massive bubble, while others see it as fairly priced or even undervalued. The key factor influencing these perspectives is expected future growth.

The Role of Growth in Nvidia’s Valuation

Valuing a business often comes down to discounted cash flow (DCF) analysis, which estimates the future cash flows a company will generate and discounts them back to today’s value. This helps determine whether the current stock price is expensive or reasonable.

For this analysis, I reverse-engineered the DCF formula to determine how fast Nvidia would need to grow to justify its current market cap of $3.4 trillion. Here’s what I assumed:

• In 10 years, Nvidia’s stock trades at 20x its free cash flow.

• Investors expect a 15% annual return—higher than an index fund but not extreme.

To make the numbers work, Nvidia would need to sustain an annual growth rate of 24% for the next 10 years.

The Bull Case: Why Nvidia Could Justify Its Valuation

If you look at historical growth rates, Nvidia has exceeded this threshold before:

• Over the past 10 years, Nvidia has grown revenue, net income, equity, and free cash flow at over 24% annually.

• Equity, the most telling metric, has grown at 31% per year.

• Recent net income growth is even more extreme, rising 112% in the last year alone.

With AI still in its early stages, Nvidia remains a dominant player in AI research, cloud computing, and autonomous vehicles. If AI adoption continues at its current pace, demand for Nvidia’s hardware should remain strong, reinforcing the bull case.

The Bear Case: Why Nvidia Might Be Overvalued

However, skeptics point out that past growth doesn’t guarantee future growth, especially for a company of Nvidia’s size.

• 10 years ago, Nvidia was a much smaller company. It’s far easier to double revenue at a small company than at a mega-cap like Nvidia, now the second-largest company in the S&P 500.

• Sustaining 24% annual growth at a $3.4 trillion valuation is far more challenging.

• Even legendary investors like Warren Buffett caution against assuming high long-term growth rates for massive companies.

The Verdict

Nvidia’s valuation ultimately hinges on whether it can sustain high growth over the next decade. If it continues its dominance in AI hardware, its stock could still have room to run. But if growth slows—even slightly—it could struggle to justify its lofty valuation. Whether Nvidia is fairly priced or in a bubble depends on how much future growth investors are willing to bet on.

Did DeepSeek Just Expose Nvidia?

A pressing question for investors has emerged with the release of DeepSeek R1, China's ChatGPT competitor. Until now, cutting-edge AI development seemed impossible without Nvidia's latest chips. Every major AI company was scrambling to get their hands on Nvidia’s most advanced hardware.

But that changed on January 20th, when DeepSeek R1 was unveiled. This AI model caught the attention of the entire AI community because it performed on par with top-tier models like ChatGPT—at a fraction of the cost and energy consumption. Even more surprising? It was built entirely on outdated Nvidia chips, proving that advanced AI can be trained without relying on Nvidia’s latest hardware.

A Wake-Up Call for Nvidia Investors

This revelation sent shockwaves through the market. Nvidia’s stock plunged nearly 20% as investors panicked. If companies can achieve high-performance AI using older, cheaper hardware, is Nvidia's dominance in AI computing at risk?

As Brian Jacobsen, Chief Economist at Annex Wealth Management, put it in a recent Reuters article:

"If DeepSeek is the proverbial better mousetrap, it could disrupt the entire AI narrative that has driven markets for the last two years. That could mean less demand for chips, reduced power needs for AI models, and lower demand for massive data centers."

For Nvidia investors, this is a serious concern. Nvidia’s stock has skyrocketed on the belief that its AI chips are indispensable. If DeepSeek proves that AI breakthroughs can happen without Nvidia’s latest hardware, the company's long-term growth story could be challenged.

The Bigger Picture

At its core, the DeepSeek development raises a critical question: Is Nvidia’s competitive moat as strong as investors think? If more AI firms can optimize software to run efficiently on older or alternative hardware, Nvidia’s stranglehold on the AI industry could weaken over time.

For now, Nvidia remains the undisputed leader in AI hardware. But DeepSeek's success is a clear warning sign: innovation isn't just happening in hardware—it’s also happening in software optimization. And that could reshape the AI landscape in ways few saw coming.

Does Nvidia Have a Moat?

In a 1999 article, just before the dot-com bubble burst, Warren Buffett shared an insightful perspective on technological hype and investing. He compared the internet boom to earlier technological revolutions, like the automobile and airplane industries. While these industries transformed the world, many of the companies competing for market share ultimately went bankrupt.

The same pattern played out in the early 2000s—the internet became one of the most important technologies of all time, yet countless overhyped internet stocks collapsed when the bubble burst.

Buffett’s Key Lesson for Investors

Buffett emphasized that investing success isn’t about predicting how big an industry will become, but rather identifying which companies have a strong and durable competitive advantage. He put it simply:

"The key to investing is not assessing how much an industry is going to affect society or how much it will grow, but rather determining the competitive advantage of any given company—and above all, the durability of that advantage."

Is Nvidia’s Competitive Advantage Sustainable?

That brings us to the big question: Does Nvidia have a durable moat?

There’s no doubt that CEO Jensen Huang and his team have executed brilliantly, dominating the AI hardware space at a time when companies are pouring billions into AI infrastructure. But recent developments, like the DeepSeek R1 breakthrough, have raised concerns. If software advancements can optimize AI models to run on older, cheaper hardware, does that weaken Nvidia’s grip on the market?

This is why investors are split. Some see Nvidia as an unstoppable force, while others question whether its competitive advantage is as durable as once thought.

What do you think? Can Nvidia maintain its dominance, or are we starting to see cracks in its long-term thesis?

The Tesla Example

The debate surrounding Nvidia is similar to the one we’ve seen with Tesla. With Tesla, there are two polarized views on its stock. Some investors treat it like a tech company with massive growth potential, while others view it as just another automaker. The difference comes down to growth rates: some investors factor in a tech-stock growth rate, while others apply a more conservative auto-manufacturer growth rate. It all depends on what you believe.

Similarly, when it comes to Nvidia, some investors view it as the undisputed leader in a revolutionary industry, seeing massive growth potential ahead. Others, however, are more skeptical, viewing it as a company that could lose momentum as competitors catch up and new, cheaper solutions emerge that reduce the need for Nvidia’s expensive hardware.

Conclusion

So, what’s your take? Are you on the side of Nvidia’s growth potential or do you see challenges ahead? Let me know your thoughts in the comments below.

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Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.