Nvidia Stock is Getting Insane.

Mad money! We love garbage. Do you get your daily news from Wall Street Bets? Is "The Wharf of Wall Street" your favorite movie? Do you call of duty by day and crypto mind by night?

Hi, I'm Chad Carlson Wallace, and over the past few hours I've been doing months of research, and today I'm excited to share with you my next big stock. So open up your brokerage accounts, ladies! Buckle up because your boy's about to make history. Today, we're all in on Nvidia!

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You know, I was thinking about doing the whole video like that, but honestly, I think that's enough Chad for one day. But yes, anyone with a keen eye probably noticed that Nvidia is currently becoming the next big meme stock. Just when you thought the global recession was hitting hard and there's no way a new meme stock could emerge, here we are!

Actually, there was even a multi-billion dollar IPO a few weeks ago too, so it's starting to feel like 2021 all over again. But yes, Nvidia stock year-to-date has risen almost 200%. But the crazy thing is that 200% rise gives the company a market cap of over a trillion dollars. So this is no GameStop; this is no AMC. Those companies are flies on the windshield compared to Nvidia. For context, a one trillion dollar market cap is a hundred and forty GameStops. Heck, it's 60 United Airlines!

The stock is actually getting so big now that it could even take the cake as the best 10-year meme stock. Have a look at the 10-year run on Nvidia versus other companies like Tesla, Apple, Meta, and so on. And as I'm sure you've already guessed, this meteoric rise is being fueled by what has to be 2023's top buzzwords: artificial intelligence.

As you probably know, Nvidia is known for their graphics cards. They design and sell GPUs for gaming, for crypto mining, and for professional applications. They sell chip systems for use in cars, robotics, and other tools. But they're also known as the lead chip maker in artificial intelligence. So these days, there's a lot of speculation about Nvidia's future potential, especially considering big tech companies like Microsoft, Google, Meta, and so on are all exploring new products and services that rely on machine learning.

The theory is, as more companies create more AI-related products and services, they'll need a lot of computing horsepower. And that's where Nvidia can create a ton of sales. In fact, just the AI buzz alone dragged Nvidia up over a hundred percent through the beginning of the year. But it was on May the 24th when Nvidia released their most recent earnings report that the stock really started to soar. In fact, after a few days, the stock had already rocketed 30%.

So what was everyone so happy about? Well, firstly, for context, Nvidia has two main business segments: compute networking and then the graphics segment. The graphics segment is quite simply sales of Nvidia graphics cards to consumers and related graphics businesses. Then in networking and computing, you have their data center platforms as well as systems for AI, high-performance computing, autonomous driving solutions, and so on.

Now, the graphics segment isn't actually doing very well at the moment. They reported revenue of 2.24 billion, down 38% year over year. So unfortunately, people just don't have the cash to buy fancy new graphics cards right now. But what investors are excited about is their compute and networking segment, which includes all their ventures in artificial intelligence.

They reported data center revenue of 4.28 billion, up 14% year over year, and their automotive business reported record revenue of 296 million, up 114% year over year. Not bad results at a time when most businesses are really struggling. But what investors were really pumped up about, of course, was their guidance. They projected that this quarter revenue would be 11 billion dollars, more than 50% higher than Wall Street estimates. That was the ticket that really sent their stocks soaring.

The company attributed this recent success to strong demand for its GPU chips from cloud vendors as well as large consumer internet companies. And Nvidia CEO Jensen Huang said that due to surging demand for its data center products, the company is focused on ramping up production to meet massive demand for AI technology. A few days later, Huang also announced Nvidia's new computer systems, software, and services for generative AI during an event in Taiwan. Those products include what the company calls a new class of large memory AI supercomputer for next-gen models powering generative AI. ByteDance and Alibaba have even just submitted massive purchase orders with Nvidia.

So as you can tell, there is a lot of positivity around this stock right now. Now, so it's unsurprising that the big money has brought it up and spiked the stock price. But there is, of course, still a big elephant in the room, and that is the valuation. And this is where things start to get a little unbelievable.

Before we get into that, one resource I did just want to plug quickly that is super useful for quick valuation like this is Simply Wall Street, the sponsor of today's video. For example, here I can type Nvidia into Simply Wall Street and the first tab over here on the left is valuation. Oops, spoiler alert! It looks like Simply Wall Street agrees with my hypothesis too.

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But now let's talk about the absurdity of Nvidia's current valuation. I want to take you back to their most recent earnings release. Despite all the positivity and all the news, we have to remember that the company reported total revenue for the quarter of 7.2 billion. And while everyone is screaming their praises, saying this figure is up 19% quarter over quarter, it's also down 13% year over year.

And of course, we have to remember that's just revenue. Once we trundle our way down the income statement, we find that while they may have a 67% operating margin, they also have 1.75 billion in operating expenses, leaving them with operating income of just three billion dollars and net income of 2.7. Even if we take their guidance for this quarter of 11 billion dollars in revenue and assume the same net profit margin, that's still only quarterly net income of 4.15 billion dollars. Annualize that to an estimated yearly earnings figure of 16.6 billion, and well, all of a sudden the stock doesn't look so hot anymore.

Remember the market capitalization of Nvidia currently sits at one trillion dollars. Even if they hit next quarter's guidance, and even if they maintained that for the next four quarters, they're still left with a PE ratio of over 60. Right now, it's even worse, with their current PE ratio around 220. So for people buying the stock, they aren't just banking on gradual growth over the next few years; they're really betting that Nvidia can grow their whole business many, many times over in the future.

This is a topic that myself and Hamish discussed over on the Young Investors Podcast recently, and Hamish actually had a really interesting way of looking at it. It gives them a price-to-earnings ratio of more than 200, which is a little high. That's just a little high. And you know, one way I kind of like to think about these crazy price-earnings ratio companies, these crazy valuation companies, is to think about what would happen if the price-to-earnings ratio normalized over time, which, you know, most companies have a PE of 15 to 20.

So if we assume that the ratio goes to 20 times earnings, even if Nvidia grew their profits 10 times to 50 billion dollars a year, the stock price wouldn't have moved. And that just shows you how much speculation is baked into the stock. You know, maybe the price-to-earnings ratio won't go back down to 20, but I feel like that's a reasonable assumption that it will revert to the mean. And if that's the case, then yeah, if you're going to do even any positive return in the stock, they would need to more than 10x their earnings, which is crazy.

So if Nvidia ended up with a PE ratio of 20 but the current market cap did not move, they would need to 10x their earnings. And for some businesses, this can be fairly achievable, particularly if the business is still very small. But Nvidia is already a big company. To ask them to turn around and 10x their business in the next five to ten years is a monumental task, particularly in their industry.

Now, while Nvidia does outsource the production of their chips to Taiwan Semiconductor, at the end of the day, these chips still do need to be built somewhere. And with the chip fabs alone taking about three years to build and the construction process of silicon being so unbelievably tedious, you can start to see the enormity of the task that Nvidia faces to justify its valuation.

But to be fair, one thing that is most definitely on their side is the industry trend. While AI and machine learning are obviously major buzzwords right now, there's no doubt this year the world has hit an inflection point, with consumers and businesses alike seeing the power of programs like ChatGPT. And with AI's promise of huge economic benefits for businesses, generally it's not surprising to see many companies wake up this year, analyze how these systems can improve efficiency, and start to experiment with AI in their own operations.

The question for NVIDIA shareholders right now, though, is how much of the stock price is actually justified thanks to the long future runway that is AI and how much is pure short-term hype. The thing I will say though is that there's certainly plenty of hype. So definitely watch out. I mean, the street notes Barclays analyst, Blank Curtis, stuck a $500 price target on the stock after earnings. Rosenblatt analyst Hans Mosesmann claimed the performance of generative AI across diverse use cases represents a historic technological turning point, and he sees it as an upcoming secular shift in semiconductor growth to create the mother of all cycles. He too raised his price target, this time to a whopping $600.

Furthermore, Deutsche Bank analyst Ross Seymour raised his price target, saying he projects an eighty percent quarter-over-quarter increase in the data center segment, which would imply a whopping 8 billion quarterly run rate, about 1.5 times the size of Intel and AMD's data center segments combined. And while I'm certainly not as smart as these guys in analyzing Nvidia, reading these examples just sends off little yellow flags in my head that I might be entering euphoria territory. And as value investors, we want to be very, very careful when that starts to happen.

But with that said, guys, please let me know what you think down in the comment section below. Let me know, do you think Nvidia stock is trending towards being that big next meme stock, or do you think that some of that valuation is justified because of the future runway of AI and their position in that industry? I'd be really interested to hear your thoughts and opinion, so definitely drop that in the comments. Please leave a like on the video if you did enjoy it, and subscribe to the channel if you haven't done so already. I'd really appreciate it. But with that said, guys, I'll see you all in the next video!