{"id":1101,"date":"2024-06-26T00:05:43","date_gmt":"2024-06-26T00:05:43","guid":{"rendered":"https:\/\/tradetrovex.com\/index.php\/2024\/06\/26\/nvidia-share-price-plunge-has-one-major-explanation-2\/"},"modified":"2024-06-26T00:05:43","modified_gmt":"2024-06-26T00:05:43","slug":"nvidia-share-price-plunge-has-one-major-explanation-2","status":"publish","type":"post","link":"https:\/\/tradetrovex.com\/index.php\/2024\/06\/26\/nvidia-share-price-plunge-has-one-major-explanation-2\/","title":{"rendered":"Nvidia share price plunge has one major explanation"},"content":{"rendered":"
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Just one week ago, Nvidia became the world\u2019s most valuable company.<\/p>\n

The chipmaker \u2013 whose shares had risen nine-fold since the end of 2022 \u2013 overtook Microsoft<\/strong> as its stock market valuation reached $3.34trn (\u00a32.63bn).<\/p>\n

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Since then, the shares have fallen by 13%, declining in each of the last three trading sessions.<\/p>\n

That has been enough to clip more than $500bn (\u00a3394bn) from Nvidia\u2019s<\/strong> stock market valuation reached when, last Thursday, the shares hit an all-time intra-day high of $140.76 (\u00a3110.94) each (taking into account the 10-for-one share split completed earlier this month).<\/p>\n

Post Office Horizon IT Inquiry \u2013 watch live<\/strong><\/p>\n

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To put that into context, Exxon Mobil \u2013 the 14th biggest company in the S&P 500 index and itself one of only a dozen companies ever to achieve the status of the world\u2019s most valuable company \u2013 has a stock market valuation of $511bn.<\/p>\n

So what is going on?<\/p>\n

There are a number of factors at play.<\/p>\n

The first is profit-taking. Nvidia shares, prior to last Thursday, had enjoyed a fantastic run and had attracted a lot of hot money from so-called \u201cmomentum buyers\u201d who see a stock moving higher and jump on board to profit from the ride.<\/p>\n

It was natural for such buyers to lock in profits by selling.<\/p>\n

Added to that is that speculative money has moved on. A report published over the weekend in the Wall Street Journal that Meta Platforms, the parent of Facebook, has held talks with Apple about integrating Meta\u2019s generative AI model into the recently unveiled Apple Intelligence system sent shares in both higher as profits from Nvidia\u2019s recent strong run were recycled.<\/p>\n

That money has not left the market \u2013 it has simply been redeployed from Nvidia to other stocks, not least Meta and Apple, but also elsewhere.<\/p>\n

That can be shown by the fact that the sell-off in Nvidia, while also dragging down peers such as Broadcom, Taiwan Semiconductor, and Super Micro Computer (a server maker which is a heavy buyer of Nvidia\u2019s chips), did not lead to a wider sell-off.<\/p>\n

The Dow Jones, admittedly not as good a barometer of the US stock market as the S&P 500, hit its highest level for a month on Monday even as the S&P 500 and Nasdaq, both of which have a heavier weighting in Nvidia, were falling.<\/p>\n

Also contributing to the sell-off was the revelation \u2013 via a filing to the main US financial regulator, the Securities & Exchange Commission \u2013 that Jensen Huang, Nvidia\u2019s founder and chief executive, has taken advantage of the recent rise in the share price to reduce his holding.<\/p>\n

Mr Huang, who founded Nvidia in 1993, sold just under $95m (\u00a374.9m) worth of shares between Thursday 13 June and Friday 21 June. Nor is Mr Huang \u2013 who still owns more than 866 million shares in Nvidia worth $102.3bn (\u00a380.3bn) at Monday evening\u2019s closing price \u2013 the only director to have been selling recently.<\/p>\n

Mark Stevens, a veteran venture capitalist who has been on the Nvidia board since 2008, has offloaded $28m (\u00a322m) worth of shares this month while Tench Coxe, another VC who was one of Mr Huang\u2019s earliest backers and who has been on the board since the start, has sold $119.5m (\u00a394.1m) worth.<\/p>\n

Selling by directors is not always a reliable guide to a company\u2019s prospects. Sometimes it reflects personal factors, such as a divorce or estate planning, rather than indicating what a director thinks of a company\u2019s prospects. Rightly or wrongly, though, it is usually taken as a negative signal.<\/p>\n

Perhaps the most significant factor in the sell-off, though, is that some investors have been looking at Nvidia through traditional investment yardsticks.<\/p>\n

The main one of these is the price\/earnings (P\/E) ratio. The higher the P\/E ratio is, the more expensively a stock is valued.<\/p>\n

Last week, after its latest gains, shares of Nvidia were changing hands at 45 times expected earnings.<\/p>\n

To put that in context, the forward P\/E of the S&P 500 is 22 times and the Nasdaq only slightly more. Put another way, investors were ascribing more than twice the value to Nvidia\u2019s future earnings as they were to those of its peers.<\/p>\n

Moreover, as the influential investment magazine Barron\u2019s pointed out at the weekend, Nvidia was being valued at some 20 times its expected sales for the year to the end of January 2026 \u2013 a racy valuation, to say the least.<\/p>\n

Stocks with those kinds of valuation have to justify it with spectacular earnings growth.<\/p>\n

Yet, as Barron\u2019s columnist Eric Savitz pointed out, Nvidia\u2019s quarter-on-quarter earnings growth has, over the last four quarters, slowed from 88% to 34% to 22% to 18%. Now, quarter-on-quarter earnings growth of 18% is still pretty spectacular. But it does not quite justify a price\/earnings multiple that has gone from 25 to 45 over the last year.<\/p>\n

Pointing out that from 1976 to 2020, stocks trading at P\/E rations of over 15 tended to underperform, Mr Savitz added: \u201cI know what you\u2019re thinking. It\u2019s different this time. This is AI! And sure, maybe AI really is the most important thing to happen in technology since cloud computing, or the internet, or mobile phones, or even the personal computer. But the numbers worry me.<\/p>\n

\u201cNvidia\u2019s market value is now nearly five times the industry estimate for next year\u2019s global chip sales-yes, the total from every company worldwide. Microsoft has seven times the number of employees Nvidia does, and twice the sales. Apple has five times the staff, and triple the sales volume. Nonetheless, this past week, Nvidia\u2019s market cap vaulted past them both.\u201d<\/p>\n

Mr Savitz was not the only investment columnist suggesting that, perhaps, Nvidia\u2019s shares might be over-valued.<\/p>\n

Some of Monday\u2019s sell-off was also fuelled by the highly influential \u2018Heard on the Street\u2019 column in the Wall Street Journal which, at the weekend, invited readers to cast their minds back to the dot-com bubble at the beginning of the century and, in particular, to the gyrations seen at that time in shares of Cisco Systems.<\/p>\n

Cisco, the Journal reminded its readers, was favoured along with stocks such as IBM, Lucent and Intel \u2013 companies whose hardware were at the forefront of connecting households and businesses to the internet. By the end of 1999, it had become the world\u2019s most valuable company.<\/p>\n

The comparison with Cisco has undoubtedly dented sentiment towards Nvidia in some quarters.<\/p>\n

Pointing out that today Cisco is now valued at 40% less than it was back then, the Journal highlighted that, at its peak in March 2000, Cisco shares were valued at 131 times forward earnings despite a less impressive financial performance than that recently shown by Nvidia.<\/p>\n

Read more:<\/strong>
How Nvidia climbed to the top of the market<\/strong><\/p>\n

Stressing that Nvidia was not is frothily valued as Cisco had been, the column added: \u201cThat doesn\u2019t necessarily make Nvidia\u2019s shares safe at their current level, though.<\/p>\n

\u201cThe stock has seen a big influx of individual investors since the company\u2019s latest financial results last month. Daily retail inflow has averaged nearly $141m since the earnings compared with a daily average of about $39m during the month prior, according to Vanda Research.<\/p>\n

\u201cSell-side analysts are also getting rather exuberant. Several have pushed up their price targets since the stock\u2019s 10 June split. And at least four of those targets are now at $160 and higher, which would put Nvidia\u2019s market capitalization near $4trn at its current share count.<\/p>\n

\u201cNvidia may be the top gun of AI, but investors should be careful not to write checks the stock can\u2019t cash.\u201d<\/p>\n

Quite so.<\/p>\n

AI is still a nascent technology and it is impossible to know, from here, who may be the greatest winners from it over time.<\/p>\n

Just as investors back in 1999, trying to predict who would be the world\u2019s biggest winners from widespread adoption of the internet, could not have known.<\/p>\n<\/p>\n

This post appeared first on sky.com<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

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