Page 2: Victim of his own success

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Often enough, market observers are keen to proclaim such symbolic events, a so-called "front page indicator", as a possible top formation. Maximum public interest seems to have been reached, everyone and their neighbor already seems to be invested in the share – the upside potential seems to be priced in.

Investors would have become very, very wealthy indeed if they had invested in Nvidia at the right time. Anyone who bought in a year and a half ago could have increased their investment more than tenfold. However, anyone who invested in the US tech company even a decade ago, which at the time was still a long way from dedicated AI solutions and generated its sales primarily with graphics cards and chips for the gaming sector, would have increased their investment more than five hundredfold. 10,000 US dollars would have become over 5 million US dollars.

Accordingly, investors now have a lot to lose and will run for cover if growth slows down. As spectacular and unrivaled as doubling sales and profits within a year may seem compared to other big techs, the hyper-growth of late 2023 and early 2024 is flattening out. At the beginning of the year, for example, Nvidia reported a 265% increase in sales and a profit explosion of over 700%.

Analysts are united behind Nvidia

The further growth prospects of the tech industry's super high-flyer are correspondingly controversial among analysts. "The pessimists will say that Nvidia's quarterly figures were good, but not great. The optimists will argue that the positive guidance for the July and October quarters doesn't even matter because the potential is still there over the next two years as AI will be bigger than the internet," says long-time tech analyst and current fund manager Gene Munster of Deepwater Asset Management, summarizing the ambivalence.

Meanwhile, following the better-than-expected figures, Wall Street is united behind what is currently the third most valuable company in the world after Apple and Microsoft, with no fewer than nine price target increases. Morgan Stanley and JP Morgan see price targets of 150 and 155 US dollars respectively, while Bank of America and Wells Fargo even call out targets of 165 US dollars.

In fact, according to traditional criteria, Nvidia no longer appears to be as highly valued as it was at the beginning of the pandemic, when the growth rates were not yet foreseeable and had not been priced in. At current prices of USD 117, the share is trading at a price/earnings ratio (P/E ratio) of 46 for the financial year ending in January and a P/E ratio of 33 based on (conservatively) expected earnings per share of USD 3.50. This is, of course, still costly by traditional valuation standards, but hardly more expensive than its big tech rivals Apple or Microsoft, which have barely or just double-digit growth.

In terms of the chart, however, Nvidia shares have suffered some damage following the recent sell-off and the setback in the latest mini stock market crash. The psychologically important 100-dollar mark, which was briefly undercut at the beginning of August, could possibly be targeted again considering increasing investor skepticism, especially if the overall environment for tech shares darkens in the volatile fall months.

Will Nvidia follow Cisco's example from the 1990s?

"I expect a consolidation phase to set in over the next six months, accompanied by a corresponding fall in the share price, followed by a further expansion of AI over the next few years," says renowned tech investor Dan Niles from Niles Investment Management. He expects some headwinds in the medium term and sees parallels with a tech superstar of the first internet era: Cisco.

"As a reminder, Cisco's stock experienced one-year declines of 26 percent in late 1995, 38 percent in early 1997 and 37 percent in late 1998, while growth expectations fluctuated. Yet the stock ultimately rose about 4,000 percent from the end of 1994 to its peak. I expect similar volatility for Nvidia in the coming years, while both sales and the share price will double in that time as the expansion of AI continues," Niles nevertheless remains optimistic for the next few years.

This would be good news for Nvidia shareholders – provided they have strong nerves and are not shaken off by sharp falls in the share price. However, the end of the party could be painful at some point: If the Cisco parallel is confirmed in the long term, there could be a long descent after the summit storm. Even today, almost a quarter of a century later, the shares of network equipment provider Cisco are still trading below the highs of the early 2000s.

(mma)