The stock price of the much hyped American technology company Nvidia has been on a truly staggering rise since September 2022 that doesn’t seem to be slowing down anytime soon. In fact, since the company posted its latest financial results yesterday, the company’s stock price is currently trading at close to it’s all time high up nearly 10% during current after hours market trading.
On 1st September 2022, the share price of Nvidia was trading at around $121 a share. A little earlier this month, the share price hit an all time high of $746 a share representing more than 6 times increase in the share price of Nvidia in less than 18 months. When the company stock hit it’s all time high it had a market capitalization of more than $1.8tn. With a current after hours market trading share price of $736, the current market cap is very close to that figure.
The latest results were on the surface very impressive. For the year ending on January 28th 2024, total revenue was $60.922bn. This is more than double the total revenue of $26.974bn for the previous year ending on January 29th 2023. Digging a bit deeper into the breakdown of its latest reported total revenue figure of $60.922bn, $47.525bn of this amount was generated from its Data Center business. This figure represents a more than 200% increase compared with the previous year figure of $15.005bn for this segment of Nvidia. A spectacular increase indeed.
What is interesting though when comparing the revenue breakdown figures for both the year ending on January 28th 2024 and the year ending on January 29th 2023 is how relatively flat the other business segments of Nvidia have been. For example, the revenue generated from its Gaming business grew from $9.067bn to $10.447bn representing a more sober increase of just 15%. In fact, for the year ending January 30th 2022, the revenue from its Gaming business was $12.426bn meaning that the revenue from its Gaming business for the year ending on January 29th 2023 actually decreased by 27%.
Revenue from its Professional Visualisation business increased by just 0.58% from $1.544bn on January 29th 2023 to $1.553bn on January 28th 2024. Interestingly, for the year ending January 30th 2022, revenue from this segment was higher at $2.111bn meaning that the current revenue from this segment is down by more than 25% from two years ago.
Pretty much the vast majority of Nvidia’s revenue growth has come from its Data Centre business. However, the important question is whether the current share price and market cap of Nvidia is justified?
Here is the problem I have. Although it is impressive for any company to more than double revenues in the space of a year, the current total revenue figure of $60.922bn is peanuts next to a market cap of $1.8tn. The share price is trading at close to 30 times total revenue. I used to think that a company trading at 10 times revenues was madness, but this company surely wins Olympic Gold for the utter insanity of its current market cap. And what is even more mind blowing here is that this is a company with a market cap of more than half of the UK’s GDP. This is not some cheeky small cap stock.
Of course, there will be some who push back on my analysis with words along the lines of Nvidia being at ‘the forefront of the AI Revolution’, etc. But none of this matters. We’ve been here before. Bubbles of this scale never end well. In fact, I will leave you with the words of Scott McNealy, the former CEO of Sun Microsystems that was one of the hot stocks during the dotcom boom and bust of the late 1990s and early 2000s…
At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?
By Nicholas Peart
22nd February 2024
(c)All Rights Reserved
LINKS/FURTHER READING:
NVIDIA Latest 10-K Form For The Fiscal Year Ended January 28th 2024
Latitude Post 