Just a week ago, Nvidia became the most valuable company in the world.
The chipmaker – whose shares had risen ninefold since the end of 2022 – Microsoft caught up while the stock market valuation reached $3.34 trillion (£2.63 billion).
Since then, shares have fallen 13% in each of the last three trading sessions.
That has been enough to withdraw more than $500 billion (£394 billion). Nvidias The stock market appreciation came as shares hit an intraday record high of $140.76 (£110.94) each last Thursday (taking into account the 10-for-one share split completed earlier this month ).
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To put that in context, Exxon Mobil – the 14th largest company in the S&P 500 index and itself one of only a dozen companies to ever achieve the status of the world’s most valuable company – has a stock market value of $511 billion .
So what’s going on?
There are a number of factors at play.
The first is profit taking. Nvidia shares had been on a fantastic run prior to last Thursday, attracting big money from so-called “momentum buyers” who see a stock soaring higher and jump on board to capitalize on the ride.
It was normal for such buyers to lock in profits by selling.
In addition, speculative money has developed further. A report published in the Wall Street Journal over the weekend that Meta Platforms, Facebook’s parent company, has held talks with Apple about integrating Meta’s generative AI model into the recently unveiled Apple Intelligence system, sent both the stock if profits soar due to Nvidia’s recent strong run were recycled.
Last week: Nvidia overtakes Microsoft
That money hasn’t left the market; it has simply moved from Nvidia to other stocks, not least Meta and Apple, but elsewhere as well.
This can be demonstrated by the fact that the sell-off at Nvidia, while also including competitors such as Broadcom, Taiwan Semiconductor and Super Micro Computer (a server manufacturer that is a major buyer of Nvidia’s chips), did not lead to a broader sell-off.
The Dow Jones, admittedly not as good a barometer for the US stock market as the S&P 500, reached its highest level in the past month on Monday, while the S&P 500 and Nasdaq, both of which have a heavier weighting in Nvidia, fell.
Also contributing to the sell-off was the revelation – via a filing with the top US financial regulator, the Securities & Exchange Commission – that Jensen Huang, Nvidia’s founder and CEO, has taken advantage of the recent share price rise to boost the stock price. to lower. his property.
Mr Huang, who founded Nvidia in 1993, sold just under $95 million (£74.9 million) worth of shares between Thursday, June 13 and Friday, June 21. Nor is Mr Huang – who still owns more than 866 million shares in Nvidia worth $102.3 billion (£80.3 billion) at Monday night’s close – the only director to have sold recently.
Mark Stevens, a veteran venture capitalist who has served on Nvidia’s board since 2008, sold $28 million worth of shares this month, while Tench Coxe, another VC who was one of Mr. Huang’s early backers and who served on the board since its inception, has sold for $119.5 million (£94.1 million).
Executive selling is not always a reliable indicator of a company’s prospects. Sometimes it reflects personal factors, such as divorce or estate planning, rather than indicating what an executive thinks about a company’s prospects. However, rightly or wrongly, this is usually interpreted as a negative signal.
Perhaps the most important factor in the sell-off, however, is that some investors have looked at Nvidia through traditional investment metrics.
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The most important of these is the price/earnings ratio (P/E). The higher the P/E ratio, the more expensive a stock is valued.
Last week, after the latest earnings, Nvidia shares changed hands at 45 times expected earnings.
To put that in context, the S&P 500’s forward price-to-earnings ratio is 22 times as large, and the Nasdaq’s is only slightly higher. In other words, investors placed more than twice as much value on Nvidia’s future earnings as on those of its peers.
Moreover, as influential investment magazine Barron’s noted this weekend, Nvidia was valued at around 20 times expected sales for the year to the end of January 2026 – a steep valuation to say the least.
Stocks with such a valuation must justify this with spectacular earnings growth.
But as Barron’s columnist Eric Savitz noted, Nvidia’s quarter-over-quarter earnings growth has slowed over the past four quarters from 88% to 34% to 22% to 18%. Now the quarter-on-quarter profit growth of 18% is still quite spectacular. But it doesn’t quite justify a price-to-earnings ratio that has gone from 25 to 45 in the past year.
Mr. Savitz pointed out that stocks that traded at price-to-earnings ratios above 15 between 1976 and 2020 tended to underperform. He added: “I know what you’re thinking. This time it’s different. This is AI! And yes, maybe AI really is the most important thing to happen in technology since cloud computing, or the internet, or cell phones, or even the personal computer. But the numbers worry me.
“Nvidia’s market value is now almost five times the industry estimate for next year’s global chip sales – yes, the total of every company worldwide. Microsoft has seven times as many employees as Nvidia, and twice as much revenue. Apple has five times as many employees and tripled sales volume. Nevertheless, Nvidia’s market cap has surpassed both in the past week.”
Mr. Savitz wasn’t the only investment columnist to suggest that Nvidia’s stock might be overvalued.
Part of Monday’s selloff was also fueled by the Wall Street Journal’s highly influential “Heard on the Street” column, which invited weekend readers to recall the dot-com bubble of the turn of the century. and in particular the fluctuations that were visible in Cisco Systems shares at the time.
Cisco, the Journal reminded its readers, was favored alongside stocks like IBM, Lucent and Intel – companies whose hardware led the way in connecting homes and businesses to the Internet. By the end of 1999, it had become the most valuable company in the world.
The comparison with Cisco has undoubtedly dented sentiment towards Nvidia in some quarters.
The Journal pointed out that Cisco is now 40% less valued than at the time and highlighted that Cisco shares were worth 131 times forward earnings at their peak in March 2000, despite a less impressive financial performance than that recently shown by Nvidia.
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The column highlighted that Nvidia was not valued as frothy as Cisco, adding: “However, that doesn’t necessarily mean Nvidia shares are safe at their current levels.
“Since the company’s latest financial results last month, the stock has seen a large influx of individual investors. Daily retail inflows have averaged nearly $141 million since earnings, compared with a daily average of about $39 million the month before, according to Vanda Research.
“Sell-side analysts are also becoming quite exuberant. Several have raised their price targets since the stock split on June 10. And at least four of those targets are now at $160 and above, which would bring Nvidia’s market cap to almost $4 trillion. current number of shares.
“Nvidia may be the best in AI, but investors should be careful not to write checks the stock can’t cash.”
Very much so.
AI is still an emerging technology and it is impossible to know from here who will be the biggest winners over time.
Just as investors in 1999 couldn’t predict who the world’s biggest winners would be if the Internet became widespread.