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Time to cash in some of your Nvidia chips?

AI darling is up 900% since August 2022

Fred Taylor //July 10, 2024//

Photo Credit: Deposit Photos

Photo Credit: Deposit Photos

Time to cash in some of your Nvidia chips?

AI darling is up 900% since August 2022

Fred Taylor //July 10, 2024//

Fred Taylor
Fred Taylor is a Partner, Managing Director at Beacon Pointe Advisors LLC.

It feels like déjà vu these days. As a professional money manager with 40 years of experience, 2024 reminds me of the year 1999 with all the hype and stock market gains from the internet mania. Back then, the stock market darling was Cisco Systems. Today, it is all about artificial intelligence, or AI, and the stock market hero is Nvidia.

Now, if you haven’t heard of the artificial intelligence chip company, Nvidia, you should. This company is up 900% since August of 2022, and up 155% year-to-date. To put it mildly, Nvidia is the graphics chips company of the artificial intelligence world. With a market share of 90% for the expensive chips that companies absolutely need to add AI to their business, there is only one company investors have been buying: Nvidia.

Last year, the Magnificent Seven large-cap growth stocks drove the stock market higher. You needed to own Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla to beat the S&P 500 index. However, this year, that group is much smaller. Today, only three stocks that are making a significant difference, Nvidia, Microsoft, and Apple, make up 20% of the S&P 500 index. But without Nvidia in the mix, the S&P 500 index market would not be up 14% YTD. Nvidia just overtook Microsoft as the world’s most valuable company.

For comparison purposes, the top five stocks in 1999 were Microsoft, Cisco, Exxon, GE and Intel, and they made up 18% of the index.  Today the top five stocks in the S&P 500 make up 35% of the index. They are Nvidia, Microsoft, Apple, Amazon, and Meta. Now, we all know what happened from 2000 to 2002: the internet bubble crashed, and investors lost most of their money in the dotcom darlings of that bygone era.

Why is market leadership so important? For one, diversification. If all your money is tied up in just a few companies, it makes it very risky if something changes with a specific company or there is a nasty bear market.

In Nvidia’s case, they don’t manufacture their own chips. Taiwan Semiconductor Manufacturing Company, located in Taiwan, is their largest supplier. This is critically important because of the tenuous relationship between the United States and China today and the possibility of China invading Taiwan in the future. If that happened, Nvidia would need to find new domestic suppliers and the stock could get crushed.

Wall Street is certainly not predicting any short-term issues for the company. In fact, it is the exact opposite situation where it is hard to find anyone who isn’t enamored with the company. Since May of 2023, Nvidia has consistently beaten earnings estimates and revenue targets by atmospheric margins. Last quarter revenue was up 262% from a year ago, driving a 629% increase in profit. Recently, the stock split 10 for 1, and because of this split, the company might even be added to the Dow Jones 30 stock index.

The problem is that too many people love the stock, and it has become expensive. Its PE, price-to-earnings ratio, has climbed from 25 to 45, and more disconcerting is it trades for 20 times expected revenue for 2026. Today, its market value is five times the industry estimates for next year’s global chip sales, the total from every company worldwide.

One only needs to remember what happened to Cisco Systems. Like Nvidia, it was the most valuable company in the world, trading at $100 a share. By the time it bottomed, it hit $12 a share, down 88%. Cisco made internet routers, which were the lynchpins of the internet.

I am not predicting the demise of Nvidia’s stock price. I am just pointing out that after such a parabolic rise, it might be wise to take some profits. There is an adage on Wall Street: Bulls make money, bears make money, and pigs get slaughtered. This may be the case here with Nvidia. I don’t think anyone went broke taking a large profit.

Fred Taylor is a Partner, Managing Director at Beacon Pointe Advisors LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. 

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