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Matt Malone, Head of Investment Management, is excited about AI, but sees Nvidia valuations as a bit rich
Key Takeaways
- The easiest way to interpret the recent spike in Nvidia’s share price is that people are really excited about the future of AI. And they should be, as it could potentially be a transformative technology.
- Nvidia is a high-margin business with significant barriers to entry, but the metrics suggest current valuations may be unsustainable.
- Investing via public markets may give you access to the “picks and shovels” of the AI gold rush, but private markets may offer better access to real innovation in the space.
Transcript
Hi, I'm Matt Malone, head of investment management here at Opto, and I'm here to answer advisor questions. One of which we've been hearing a lot lately is what's going on with Nvidia and how do we interpret the spike in the Nvidia share price? Well, I think the easiest way to interpret it is that people are really excited about the future of AI, and we think they should be. It has the potential to be a transformative technology across many different industries. But as we dig a little deeper, let's look at what actually happened.
Nvidia announced earnings which beat expectations. But we're actually overall down a little bit year over year. The highlight of the earnings report was that the business unit associated with building chips for artificial intelligence was up about 15%. More importantly, Nvidia's projecting an increase of revenue of about 60% next quarter, driven by demand for chips supporting artificial intelligence businesses. So this all sounds great. Where are the issues? Well, another one in the good news category, Nvidia, is a high-margin business with significant barriers to entry. But where we start to see a need for caution is in the current valuation.
Nvidia is trading close to a $1 trillion market cap, which equates to a 20x forward revenue ratio, a 50x forward PE ratio, or about 150 times current EBITA. And even if you believe an explosion in AI valuations, these metrics feel very rich. What does this mean? People are excited about artificial intelligence, but there are limited ways to invest in this trend in public markets. Nvidia is generally a bet on the picks and shovels portion of the artificial intelligence gold rush, but what people don't have access to and where the real innovation is happening is in private markets.
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