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Frothy Nvidia shares take a belated tumble

Even bulls might admit the stock arguably came too far, too fast

Jensen Huang, co-founder and chief executive of Nvidia Corp. Photograph: I-HWA CHENG/AFP via Getty

Proinsias O'Mahony
Tue Jul 2 2024 - 05:46

Nvidia’s recent descent was almost as fast as its dizzying ascent. Just after becoming the most valuable company in the world, the stock cratered, falling 16 per cent over three days and erasing more than $550 billion in market capitalisation.

That sounds dire, but it merely brought shares back to where they were trading a fortnight earlier. Even bulls might admit the stock arguably came too far, too fast.

At its recent peak, shares were about 100 per cent above their 200-day moving average. Since 1990, notes technical strategist Jonathan Krinsky, the largest US company has never been so technically extended – not even Cisco at the peak of the dotcom bubble in March 2000.

The speed of Nvidia’s ascent put it “in a league of its own”. Fundamentally minded sceptics note Nvidia had gained more than $1 trillion in market capitalisation in just six weeks. It was valued at more than $100 million per employee.

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Value investor Christopher Bloomstran complained the company was trading at 42 times trailing sales and 78 times trailing earnings on an “unsustainable” net profit margin of 54 per cent.

Bulls might retort that investors are looking forward, not back. Nvidia merits a premium valuation due to its explosive growth, the argument goes, and surging earnings estimates mean it is actually cheaper than it was a year ago. Tuesday’s rapid rebound – the stock surged 6.7 per cent – suggests that narrative remains popular.

Still, the stock has lately become more expensive. Nvidia trades on 48 times estimated earnings, compared with 36 three months ago, 30 six months ago, and 24 nine months ago.

Bubbly? No. Frothy? Perhaps. After a stellar run, Nvidia’s valuation is giving some investors pause.

Proinsias O'Mahony

Proinsias O'Mahony

Proinsias O’Mahony, a contributor to The Irish Times, writes the weekly Stocktake column

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