“It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.
John Maynard Keynes, General Theory of Employment, Interest and Money, 1936.
Take a look at this madman. That’s a fearsome wall of water for most individuals. But for this brave soul, it was a challenge to conquer. Can anyone deny that his conquest of the towering wave is somewhat akin to Nvidia Corporation (NASDAQ:NVDA) CEO Jensen Huang’s consistent ability to surpass market expectations? The last two earnings reports were massive wins, and the consensus got swept under a massive wave of skyrocketing growth. Analysts are scrambling to revise estimates upward, with 100% of revisions being positive, as indicated below.
As this earnings report approaches, it will be a crucial juncture, indicating how enormous Nvidia’s earnings wave could become. If analysts have caught up or even surpassed the company’s earnings pace, then investors might face disappointment. Similar to big wave surfing, the trillion-dollar club often disregards fundamentals. When riding big waves, being towed in is necessary, and unlike standard surfing, foot stirrups are used since a leash could be disastrous. In traditional surfing, however, the leash is a lifesaver.
The stock market and surfing cultures are rarely equated, but in some respects, they are similar. Just as investors navigate the capricious and forceful whims of the crowd with the elusive goal of buying low and selling high, big wave surfers risk being engulfed and panicking during downturns. John Maynard Keynes made an astute observation regarding stock prices when assessing a newspaper contest where participants were tasked with picking the six women whom the crowd would consider the prettiest. This underscores the importance of analyzing crowd opinions and inclinations in stock evaluations.
However, despite the intricate nature of Nvidia’s cutting-edge chips, most individuals investing in the company lack the knowledge to evaluate its capital projects effectively. Stock analysts, on the other hand, possess the necessary tools to appraise intrinsic and relative valuation.
Regrettably, Nvidia performs poorly across the board in both intrinsic value measures and relative valuations. While the entire sector is somewhat overvalued, Nvidia tops the list as the most overvalued among its peers.
Thus, the question arises: if primary valuation tools indicate that Nvidia is overvalued, why should anyone invest in it? Undoubtedly, there are risks involved, and much like a towering wave in the image, the stock is daunting to acquire, especially following its remarkable surge. However, like following a set of incoming waves, investors must gauge crowd sentiments and time their investments wisely. In my previous pre-earnings report, I correctly anticipated the company’s outstanding earnings performance. Those who purchased the stock following a significant earnings surge are reaping the rewards, rather than lamenting its overvaluation.
Given the exorbitant valuation, the stock is susceptible to interest rates and is highly prone to sharp declines due to its high-beta nature. Continuous Chinese bans could also affect the company, but I believe that a U.S.-China reconciliation will benefit the entire chip sector. Furthermore, Nvidia is taking measures to mitigate the bans’ impact on future earnings. Notably, some Chinese clients have already stockpiled sufficient chips for the foreseeable future, demonstrating the company’s pricing power.
Despite the aforementioned risks, I would consider buying Nvidia even in the event of an earnings miss. The company’s robust performance during the most stringent tightening cycle in recent history is indicative of its potential resilience when rates begin to decline. Therefore, it is worth the inconvenience of managing risks and high volatility due to the company’s track record of delivering historic returns to shareholders.
In conclusion, Jensen Huang’s astute capital allocation, steady leadership, and diverse exposure to cutting-edge technological trends validate Nvidia’s premium valuation. The company’s technological dominance and ability to generate significant returns to shareholders justify the premium. As the age of artificial intelligence beckons, Nvidia’s cresting wave is on the horizon, and this fantastic company is set to sail it with unyielding success.