This morning, I had an important talk with my Executive Editor Chris Reilly about Nvidia’s (NVDA) huge influence on the stock market.
Can this once-in-a-lifetime company continue to propel markets higher… or is the stock market now topping out?
Our transcribed conversation follows.
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Chris Reilly: Stephen, Nvidia just became the second-largest company in the world.
It’s now worth over $3 trillion... surpassing Apple (AAPL)... and now right behind Microsoft (MSFT) for the #1 spot.
It’s up 140% this year—after soaring 240% in 2023.
“Dominant” doesn’t begin to describe it.
Stephen McBride: We’re part of history. We’ve never seen this rapid growth from a multitrillion-dollar company before. Nvidia’s artificial intelligence (AI) chip sales have quintupled in a year. It’s been a fun ride being in Nvidia since 2018.
Today, I want to talk about caution, though. Because some of the behavior I’m seeing around Nvidia has me concerned.
Did you see the viral picture of CEO Jensen Huang signing a woman’s chest like he’s a rockstar?
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Chris: Yes. And I remember you said if Nvidia became the world’s largest company, it would be a potential top signal.
Stephen: Right, I first said that one year ago. At the time, NVDA was nowhere near #1—not even one-third the size of Apple.
I said, “Nvidia claiming the crown as the world’s largest company seems unlikely, but anything is possible as the AI boom heats up.”
Here we are a year later, and it’s now looking probable.
Everyone is talking about NVDA. Many are raving about the stock. Generally speaking, you don’t want to buy stocks that taxi drivers and baristas are raving about.
Chris: So you’re saying Nvidia has topped out?
Stephen: No, I’m saying investors’ behavior around Nvidia has me cautious. This is an important distinction.
Nvidia the company has done nothing but deliver. It continues to produce incredible results that will be legendary.
As my partner Chris Wood said in yesterday’s Disruption Investor issue, “What’s interesting is that the stock still isn’t all that expensive when you consider its earnings growth. My model shows NVDA could double from here in the next two to three years pretty easily. So it’s still a good buy today for folks who don’t own it yet.”
Chris: Have you seen the comparisons to Cisco Systems (CSCO) from the 1999 dot-com bubble? Nvidia’s trajectory looks a lot like Cisco’s. Cisco eventually crashed.
Stephen: Yes. It’s an embarrassingly shallow analysis. Cisco sold tech equipment to new dot-com companies that could barely afford it and ran on borrowed money. When the bubble popped, many of its customers disappeared.
Nvidia sells to Apple, Google (GOOG), and Amazon (AMZN)… the richest companies in the history of Earth.
Remember, Nvidia essentially has a monopoly on the GPU chips needed to keep powering the AI boom. Fundamentally, the company is as strong as ever.
But from a sentiment perspective—how investors are feeling and acting—caution is warranted.
A mood change is all it would take to drop Nvidia’s price by 30%. That would be a buying opportunity.
Chris: There’s a lot of talk that Nvidia is propping up the stock market, and if it falls, the house of cards will come down. Thoughts?
Stephen: Noise. Bigger picture, I think Nvidia’s skyrocketing price proves the AI boom is starting to broaden out.
Chris: What do you mean by that?
Stephen: Nvidia’s got all the attention, right? Well, there are many lesser-known companies set to capture unfathomable amounts of money being poured into the AI buildout.
Think about this. Nvidia’s chips are 100X (!) faster than they were a decade ago.
But all the other parts that make up a data center—networking equipment that allows the chips to “talk” to each other and so on—have only gotten about 4X faster.
This creates a bottleneck where Nvidia’s chips can only work 30% of the time. The other 70% of the time, these $40,000 chips sit idle… but still use full power.
I expect a lot of spending and innovation to shift toward the lagging parts of the data center equation: cooling equipment, storage, next-gen fiber optic cables, and so on.
Many smaller companies make this stuff. Their stocks aren’t “hot” yet… but they will heat up in the coming months.
Chris: Thanks, Stephen. I know you plan to elaborate on this during our next private RiskHedge Reserve quarterly call, set for June 27. I’m looking forward to hearing more about these lesser-known AI stocks that are up next.
