There’s one stock everyone wants to talk about: Nvidia (NASDAQ: NVDA)And for good reason. The stock has gained nearly 1,000% in less than two years, meaning a $10,000 investment in late 2022 would be worth about $100,000 today.
While no one can predict what will happen, there are two paths ahead for NVIDIA. One is promising, the other is downright terrifying. Let’s dig deeper and see what’s most likely.
The Real Issue: Nvidia is Apple circa 2004
Nvidia’s bullish case goes like this: artificial intelligence It’s the story of the next 20 years. And it will bring changes in the way people interact on a level equal to or greater than those brought by the smartphone in the mid-2000s. So the best historical comparison for Nvidia is apple In 2004.
At the time, the new product Apple was launching was—wait for it— iPodRemember that? The company didn’t get to release the first iPhone until three years later.
However, Apple was already on its way to becoming the world’s largest company. In 2004, its stock rose more than 200%, making it the world’s best-performing company. Standard & Poor’s 500.
From 2004 until today, Market value The compound annual growth rate (CAGR) has increased by 36%. A $10,000 investment made 20 years ago would be worth $4.8 million today.
It will be extremely difficult for Nvidia to replicate this performance, but it is possible. AI is a fascinating new technology, and 20 years is a very long time, giving the company plenty of time to live up to the high expectations surrounding its stock.
But what about the bear issue?
Bear Case: Nvidia Is Oracle Around 2000
This is where Nvidia stocks could go downhill: AI is a promising but overpriced technology. Because of the high valuations of AI stocks, a bubble has formed in the stock market, and when it bursts, Nvidia stock will feel the pain. In short, Nvidia today is like inspiration In 2000.
In short, the nineties were a period full of hope. InternetIn particular, the stock market went crazy over Internet stocks. Valuations soared, not just for new companies, but also for older technology companies that were benefiting from the Internet craze.
In particular, Oracle, whose business revolved around facilitating the transition from mid-20th century mainframe computers to modern servers for enterprise customers, saw its stock soar in the late 1990s.
Unfortunately, expectations were much higher than actual sales for Oracle. At its peak in 2000, its shares were trading at a price-to-sales multiple of 24, well above its lifetime average of 5.
When the dot-com bubble burst in 2001, Oracle saw an 85% drop. It took more than 20 years for the stock to recover its pre-bubble highs. Those who bought in the summer of 2000 and held on until 2020 made almost no money on their investment.
It’s a lesson that even companies with the most promising technological innovations and strong business models don’t necessarily make big investments.
So which one is it?
On the other hand, Nvidia’s price-to-sales ratio is eerily similar to that of Oracle in the period leading up to its collapse in 2001.
This should give anyone who has been betting on Nvidia stock pause. In short, the stock is now so expensive that some moderation is warranted.
Either the company’s sales continue to grow too fast to lower the ratio, or the stock price has to fall. Factors such as increased competition, market saturation, or slowing spending on AI and semiconductors could lower Nvidia’s price-to-sales ratio.
My gut tells me it’s the latter, though the party could go on for a while. Either way, I’d recommend caution with Nvidia stock.
Unlike many of its mega-cap peers, the company lacks a well-diversified business model. Its stock is doing well because spending on artificial intelligence and semiconductors has skyrocketed, but that trend could slow — especially if the economy deteriorates or enters a recession.
Moreover, if demand for AI and semiconductor technology declines, Nvidia stock could face a difficult path — perhaps as bad as Oracle’s 23 years ago.
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Jake Lersh The Motley Fool has positions in Nvidia. The Motley Fool has positions in and recommends Apple, Nvidia, and Oracle. The Motley Fool has Disclosure Policy.
Where will Nvidia stock be in 20 years? Originally posted by The Motley Fool