Nvidia is the story stock of 2023, and some analysts are giddy with excitement. “They’re the Godfather of AI [artificial intelligence],” Wedbush’s Dan Ives said last week, after Nvidia announced blockbuster earnings. Nvidia’s guidance was “historical” and would be “heard around the world”, Ives breathlessly enthused.
Hyperbole? Just a little.
Still, more than 20 brokerages raised their price targets. The most bullish was Elazar Advisors’ Chaim Siegel, who predicted Nvidia shares would more than triple to $1,600 (€1,482). “I still think my numbers are too conservative,” he added.
Nvidia, which makes chips needed to power AI applications such as ChatGPT, did indeed deliver spectacular results. Not only did it trounce analyst sales estimates ($11.2 billion), it blew past the so-called whisper number (more than $12 billion), announcing quarterly sales of $13.5 billion. Guidance of $16 billion exceeded even the most optimistic whisper estimates.
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Gross profit margins soared, from 45.9 per cent a year ago to 71.2 per cent. Nvidia’s fundamentals are unquestionable, but shares have already come a long way. Ritholtz Wealth Management’s Ben Carlson notes that as recently as 2020, Nvidia’s wasn’t even in the top 10 of the Nasdaq 100.
The stock has since risen tenfold, making it the sixth-most-valuable company in the world with a market capitalisation of $1.2 trillion. Dimensional Fund Advisors data shows that, historically, a company that becomes a top 10 S&P 500 stock has enjoyed an average annualised outperformance of 20 per cent over the previous five years, and 26.3 per cent over the previous three years.
However, that outperformance vanishes in the three, five, and 10-year periods after a company becomes a top 10 stock. Trees don’t grow to the sky. Investors should be wary of buying into the hype.
