How might the AI trend impact earnings of NVDA and is MSFT and history a guideline?
Bare with me, I’m pontificating a bit here in front of NVDAs (invidia latin for envy) earnings. I’m sure many will disagree. It’s a great company, but what is it worth in 5-10-15 years? I would argue, about what we are paying for it now if history is a guideline.
NVDA lost a key contracts with AAPL over the years and had a decade of non performance for shareholders. They are not infalible to mistakes. Great companies like INTC too made mistakes along the way and have had long periods where they performed pooly after huge valuations. The great MSFT peaked at the top of the DOT COM bubble and had 15 years of disapointment for shareholders as EPS caught up to expectations. All are great companies and are well positioned for the economy ahead. Productivity enhancing AI, cloud, quantum and the list goes on. I have no issues at all with this aspect of factors driving future growth. It’s very exciting and very bullish. But…
After the Dot Com bubble burst, MSFT’s EPS generally continued to grow with a few hiccups along the way. But the stock return was poor for a decade. I can’t imagine work life without MSFT Office as an analytical portfolio manager that crunches numbers. I believe AI will be very helpful in managing portfolios in the future too. I’m not sure Excel will be the right delivery for it. Drafting written documents with Chat GPT looks promising, so Word can benefit to be sure. MSFT office helps me in many ways every hour of the workday. NVDA (and others like INTC) give MSFT the ability to crunch those number. They are all essential. But look at the performance of INTC since the dot com peak in 2000, shareholders have seen zero growth.
As I have said for decades, a good company is not necessarily a good stock. As we approach earnings this week for NVDA, there is lots of excitement. The market can celebrate the same message many times. The reported short position in the stock is relatively small around 1% (0.6 days to cover). There are 52 Buys, 6 Holds, and 1 Sell (Morningstar). The weighted average price target is 20% higher. In May, prior to last earnings, analyst’s valuation expectations were below where the stock was trading. I tend to discount what the Wall Street cheerleaders tend to say a company is worth, but you do want to know what they think. To say there is a lot of good news priced in would be an understatement. The trailing P/E is 210X and the forward P/E is 53X. Perhaps I’m very wrong about this or I’m early, but we have to ask the question given the similarities we see with other hyped-up periods over history. I recall companies in late 1999 adding dot com to their names and talking about the internet in their earnings when they had nothing much to do with it. Kind of like a failing mining company suggesting Y2K and the internet would change their profitability.
ETF Capital Management: ETFCM.com