There is one stock that has captured the imagination of nearly every market enthusiast: Nvidia (NASDAQ: NVDA). The meteoric rise of this stock, surging by almost 1,000% in under two years, has turned a $10,000 investment from late 2022 into nearly $100,000 today.
The future for Nvidia is bifurcated: one path gleaming with promise, the other shrouded in ominous clouds. Let us embark on a journey to decipher which path holds more sway.
Image source: Getty Images.
The Optimistic Scenario: Nvidia akin to Apple in 2004
The optimistic narrative for Nvidia draws parallels with Apple in 2004: a tale of Artificial Intelligence (AI) heralding the dawn of the next two decades. Just as the iPhone revolutionized communication in the mid-2000s, AI is poised to reshape human interaction. This historical echo places Nvidia in the shoes of Apple circa 2004.
In 2004, Apple’s magnum opus was, drum roll, the iPod. Remember those glory days? The iconic iPhone was still three years from its debut. Yet, Apple was already hurtling towards the zenith, clinching the title of the S&P 500‘s top performer with over 200% growth.
From 2004 to the present day, Apple’s market capitalization has snowballed at a compound annual growth rate (CAGR) of 36%. A $10,000 bet made two decades ago would have burgeoned to $4.8 million today.
AAPL total return level data by YCharts.
While replicating Apple’s feat may seem Herculean, it remains within Nvidia’s grasp. AI, a captivating innovation, coupled with a vast 20-year runway, provides Nvidia the canvas to paint a masterpiece worthy of its stock’s lofty eminence.
But what about the foreboding shadow?
The Pessimistic Outlook: Nvidia drawing parallels with Oracle in 2000
The skeptic’s rationale for Nvidia draws eerie similarities with Oracle in 2000: an AI landscape aglow with promise but obscured in hype. The stratospheric valuations in AI stocks have precipitated a stock market bubble, foretelling an impending reckoning for Nvidia’s valuation. In essence, Nvidia today mirrors Oracle in the turmoil of 2000.
The 1990s bore witness to an internet-infused euphoria, with the stock market ablaze for all things internet-related. A fervor not only for nascent tech entities but also for established tech stalwarts cashing in on the cyber-rush gripped the era.
Oracle, primarily facilitating the transition from archaic mainframes to contemporary servers for corporate patrons, soared amidst the late 1990s frenzy.
Yet, Oracle found itself ensnared in the tendrils of hyperbole, with anticipations careening far ahead of tangible revenue. At its zenith in 2000, Oracle commanded a price-to-sales (P/S) multiple of 24, a staggering departure from its enduring mean of 5.
ORCL PS ratio data by YCharts.
When the dot-com bubble burst in 2001, Oracle weathered an 85% retreat. It took over two decades for the stock to retrace its pre-bubble peaks. Those who entered the market in the summer of 2000 and held steadfast till 2020 found scant profitability in their investments.
This saga underscores that even companies harboring groundbreaking technological marvels and robust business frameworks may not necessarily furnish lucrative investment avenues.
The Verdict?
Nvidia’s P/S ratio mirrors Oracle’s ominous trajectory towards the 2001 crash, cautioning all Nvidia optimists. Put simply, the stock’s current exorbitance beckons a reckoning.
ORCL PS ratio; data by YCharts.
In essence, either Nvidia’s astounding prospects must align with its lofty valuation, or a sobering correction lurks on the horizon.
Nvidia Stock: A Rollercoaster of Growth and Caution
Challenges on the Horizon
As the sales of Nvidia continue to surge, concerns about the company’s price-to-sales (P/S) ratio loom large. The dilemma is clear-cut: either the sales explosion must persist to rein in the P/S ratio, or the stock price will inevitably plummet. Factors such as escalating competition, market saturation, or a slump in AI and semiconductor investments have the potential to trigger a decline in Nvidia’s P/S ratio.
Future Uncertainty
The signs are there, whispering of a looming downturn. While the party may rage on for a while longer, a cautionary tale seems to be unfolding. Nvidia’s stock, unlike its counterparts in the mega-cap realm, lacks a diversified business model. The stock’s current resilience is predominantly attributed to the AI and semiconductor boom, which might soon lose its fervor, especially if the economy falters or plunges into a recession.
Should the demand for AI and semiconductor technology wane, Nvidia’s stock might be in for a turbulent journey, one reminiscent of Oracle’s troubles 23 years ago.
Investment Advice
Before contemplating an investment in Nvidia, it’s crucial to heed the warnings of caution. The scenario is not as rosy as it seems. Unlike the renowned Motley Fool Stock Advisor’s top picks, Nvidia failed to make the cut for the 10 best stocks to buy now. The prospects of monster returns rest with those recommendations, not Nvidia.
Reflecting on Nvidia’s inclusion in the list back in April 2005 paints a stark picture – an investment of $1,000 then would have mushroomed to a staggering $722,626! However, this past glory does little to guarantee future success.
The Motley Fool’s Stock Advisor service, having outperformed the S&P 500 fourfold since 2002, offers a reliable blueprint for investors, crafting portfolios with precision, providing regular analyst updates, and introducing two fresh stock picks each month.
Is it prudent to follow in Nvidia’s path, or should investors tread cautiously amid the looming uncertainties in the market?
