Ken Mahoney
Connor Mahoney
The short answer to us is certainly no. This is most likely just the beginning of a transformational shift in technology, similar to the beginning of the internet, or in the early 2010’s with the adoption of smartphones.
There has been continued massive investment from companies into artificial intelligence, and some huge players are obviously getting involved here, as the market for AI products and services has some huge expectations, as the total contribution of AI to the global economy is expected to hit $15.7 trillion by 2030 (PwC Global).With the moves that have been made in the stock market due to AI have brought about comparisons to the bubble in the late 1990s. So the question becomes: is it different this time? To this point, yes it is.
The big reason we see it as being different this time is because there is actual revenues and spending backing this run, particularly in stocks like Nvidia who is at the epicenter of all this. The quarterly revenue increases 22% to $22.1B from Q3 to Q4, and surged 265% year-over-year. Full year revenue increased 126% to $60.9B, and they most likely will end this year with over $100B in revenue, yet another staggering increase.
The market is no fool to acting on this information, hence the price movement. The surge in earnings may eventually come to a slow down/halt, and that could be a good time to re-asses, but calling it a bubble while we have these staggering growth numbers is just denying reality.
Another good example is Meta is increasing its computing infrastructure, adding about 600,000 H100 chips or equivalents to that, looking at $9B in expenditure here at minimum. So sometimes to the naked eye, we are not seeing what companies are doing to get involved and spend on AI expansion since it is mostly B to B transactions. Notably, Amazon and Microsoft, and Google are all are seeing some very sizable investments here as well.
We believe many have and will continue to get stuck in the valuations trap for Nvidia and other stocks showing growth like the above stated for example. They may also say the market is supported by too few stocks and is narrow…to that we say “so what!”, you can invest in it anyways.
And generally speaking, the larger cap weightings in the S&P 500 have led most of the gains historically. We hear a lot about the Magnificent 7 leading the rally for the last year, it is unsustainable for them to have such heavy weight in the market. And if that is the reason you are sidelined and in cash, its time to re-asses.
We also need to remember why these stocks are leading and can look at key growth data:
EPS Growth Q4 YOY
AMD – 4,000%
NFLX – 1,660%
NVDA – 763%
AMZN – 274%
META – 207%
GOOGL – 41%
MSFT – 32%
AAPL – 16%
All of these companies are good examples of those that they already have a successful core business, and then they are able to layer AI on top of and monetize it have it be an accretive to those verticals already established. And also, if you have been paying attention, it has not just been 7 stocks in the market going up as of late. This leads us also into why pessimists have and will continue to miss large gains in these stocks due to what we call the ‘valuation trap.’
At the time of writing, Nvidia’s PE is about 72, which is not anything overzealous for a growth stock historically. We are more focused on forward PE however, and that is what led us to buying this stock hundreds of points ago, as the earnings keep playing catch up.
The market discounts the future, not the past and that is the more important measurement and with a 35 forward PE. We are here again, saying if the earnings continue to grow, this stock will continue to surprise everyone.
We wrote in a different column back in September of 2023 the following about Nvidia specifically, and cited the forward P/E chart below:
“This statement may seem outlandish, but when you dive into the numbers and different multiples, you will realize that it is true. With Nvidia trading in the 450 range, with a massive increase in analyst estimates after back to back blowout quarters, it is trading at its lowest forward PE multiple since last December.
The forward PE currently sits around 35 while it is in the midst of the ‘hockey stick’ of growth phase. Many of those who have already written it off as too expensive may miss a potential leg up again down the road in fear that there could be a downturn coming in their earnings, but the management team has laid it out that they are only in the third inning of this AI movement with extreme high demand of their products/services they believe…Prior to the most recent earnings report, analysts has earnings of $7.95 a share in fiscal 2024 and $11.53 in fiscal 2025.
After coming out with the once again blowout numbers cited above, those estimates had risen to $10.6 and $16.52 respectively, and the forward P/E shot down since the denominator in the ratio is so much higher now. . So if investors thought they missed the boat a year ago, there still is a bull case based on the forward P/E metric that is used to measure such hyper growth companies. If the earnings continue to be as robust as they are, there is no reason to not like the stock here.”
(LSEG Datastream by Reuters”)
We are not claiming to be a genius or give you the crystal ball on the next big stock, but we know for a fact that companies that massively beat estimates and raise guidance tend to perform quite well, and that is exactly what they have done. We then get analysts upgrading the stock and institutions piling in, as well as retail and you get this explosion we have seen.
Once we see a slow down in earnings is the moment we may re-consider things, but until then, it is a continue to hold.
As written in the above anecdote, we are aware that the CEO Jensen Huang himself has been loud and clear that we are just at the beginning of this movement in AI, and we will be keen on the upcoming event starting March 18th, and get some more detailed information and tid-bits about his thoughts of the future.
Again, we are focused on the picks and shovels of AI here, and there will be a time potentially to be very cautious and some of the broken clock that is right twice a day bubble callers will eventually be correct. If you start seeing new IPO’s that claim to be an AI company that fly, or penny stocks that tag AI into their name start to go from $2 to $30 very rapidly, then we may be having some problems. We are not noticing any of that behaviour yet and are riding the wave. Again, we know real revenue is dropping to these companies bottom lines, and a lot of times these trends last longer then anyone could expect.
There are other risks of course, like how the U.S. policy enacts around chips, as well as potential trade embargos with foreign countries, as well as supply chain issues. It is a better problem to have that there is not enough supply to meet demand then the other way around however. You also don’t have to be a hero and pick the best performer, there are plenty of ETF’s out there that hold some of these market leaders.