History Has Not Been Kind to the Kings

Two things can be true even if they seem contradictory. In this case, Nvidia has earned its valuation, and also, its current valuation is likely to lead to poor returns at some point in the future.

My colleague Nick Maggiulli wrote a post, “Is Nvidia Overvalued? The $3 Trillion Question.“

The TL:DR is that Nvidia is trading at a multiple of sales so high that future returns are likely to disappoint. He used this chart to prove his point.

Nick’s rationale is reasonable and widely held among investors who don’t own Nvidia’s common stock (hand up). Nick mentioned the strong fundamentals in his post, but I want to put some more meat on those bones. Strong doesn’t begin to scratch the surface.

Michael Cembalest also recently published a killer post on the AI trade. In it, he said, “Nvidia bears no resemblance to dot-com market leaders like Cisco (see below) whose P/E multiple also soared but without earnings to go with it.”

The margins, the growth, the revisions, oh my.

But the thing is, we all know how great Nvidia is. It’s the king of the market, and history has not been kind to the kings. Once you get to the top of the mountain, so to speak, there’s nowhere to go but down, as you can see from the chart below.

So, is Nvidia doomed? I don’t know. Look at Apple. That monster has been on top of the mountain for the last ten years and has still delivered outstanding returns. This is probably an unfair comparison, given that Apple was a value stock when it took the crown. I’m only making the case that these tech giants bear little resemblance to the winners of the past.

Sometimes history repeats, and sometimes it rhymes. As Michael Batnick once said, “The twelve most dangerous words in investing are ‘The four most dangerous words in investing are, it’s different this time.’”

I’ll give the final word to Nick, a message in which we’re in full agreement on: