All the excitement and hype has generated massive investor interest in the company, not only in its shares but even more so in its derivatives. The volatility in Nvidia shares relative to the broader market (the beta) has spiked sharply higher. The stock now has the highest beta among the Magnificent Seven, the leaders in the US equity market rally, at 1.74. This high price volatility encourages speculative trading. So much so that we think Nvidia has become a “gambling” stock.
Stock prices and valuations are driven by storytelling. Yes, this would be contrary to what all the finance textbooks will teach you. And if one were to be very, very good at telling stories, one could spin enough hype, convince market investors and keep valuations far higher and far longer than underlying earnings could rationalise or justify. And there has been no bigger story than Nvidia over the past two years, fuelled by the excitement surrounding generative artificial intelligence since the public launch of ChatGPT at end-November 2022.
Nvidia’s share price has soared manifold since then, from around US$15 at the beginning of 2023 to as high as US$140 in June 2024, before paring gains to around US$100 currently (at the time of writing). The stock is currently trading at significantly higher-than-market average valuations — price-to-sales of almost 28 times and price-to-earnings (PER) of more than 50 times — predicated on the belief that demand for AI technologies, hence demand for its chips, will continue to grow at a sustained breakneck pace. Indeed, current valuations also suggest that the company can maintain its near-monopolistic position as well as huge margins for its GPUs (graphics processing units). That is the power of good storytelling!
