There’s a buzz circling around one stock in the financial world: Nvidia (NASDAQ: NVDA). And rightly so. The stock has made an astounding leap of nearly 1,000% in under two years, leading to the potential multiplication of a $10,000 investment in late 2022 to almost $100,000 today.
While anticipating the future is shrouded in uncertainty, two distinct trajectories lay ahead for Nvidia. One is filled with promise, while the other veers into the realm of fear. Let’s explore these divergent paths and assess which is more probable.
Image source: Getty Images.
The Positive Outlook: Drawing Parallels Between Nvidia and Apple in 2004
Envisioning a bullish scenario for Nvidia parallels aligning with Apple’s trajectory in 2004: Artificial intelligence (AI) stands as the narrative of the next two decades. The transformative impact of AI on societal interactions mirrors, if not surpasses, the influence the smartphone wielded in the mid-2000s. Consequently, Nvidia finds its historical alignment akin to Apple’s positioning in 2004.
Reflecting back, Apple’s groundbreaking product then was none other than — drumroll, please — the iPod. Remember that innovation? The debut of the first iPhone was still three years away.
Regardless, Apple was already forging its path to becoming the world’s leading company. By 2004, its stock had surged over 200%, emerging as the top performer in the S&P 500.
From 2004 to present day, its market capitalization has ascended with a compound annual growth rate (CAGR) of 36%. A $10,000 investment made two decades ago would now stand at $4.8 million.
AAPL total return level data by YCharts.
Although duplicating such performance as Apple’s seems daunting, it remains within the realm of possibility for Nvidia. AI stands as a captivating frontier, and the expanse of 20 years provides ample opportunity for the company to meet the towering anticipations encircling its stock.
Now, let’s pivot to the opposing viewpoint.
The Cautious Perspective: Drawing Parallels Between Nvidia and Oracle in 2000
The cautious stance on Nvidia draws resemblances between its current status and Oracle’s predicament in 2000. While AI presents a promising technology, the hype surrounding it has inflated valuations in AI-centric stocks, nurturing a stock market bubble scenario. If this bubble bursts, Nvidia’s stock will likely suffer. In essence, Nvidia’s current position mirrors that of Oracle in the early 2000s.
Reflecting on the 1990s, the era was brimming with optimism for the internet. The stock market was fervently enamored with internet-oriented stocks, driving valuations skyward for not just nascent companies but also legacy tech firms capitalizing on the internet frenzy.
In this milieu, Oracle, with a business centered on facilitating the transition from mid-century mainframes to contemporary servers for enterprise clientele, witnessed its stock catapulting in the late 1990s.
Unfortunately, Oracle found itself at odds with reality as prospects soared above actual sales figures. At its apex in 2000, the stock boasted a price-to-sales (P/S) ratio of 24, soaring far beyond its historical average of 5.
ORCL PS ratio data by YCharts.
With the dot-com bubble’s implosion in 2001, Oracle weathered an 85% plunge. It took over two decades for the stock to reclaim its pre-bubble peak. Investors who entered the market in the summer of 2000 and persevered until 2020 saw minimal returns on their investments.
This serves as a stark reminder that even companies harboring groundbreaking technological innovations and robust business models don’t invariably translate into exceptional investments.
Navigating the Crossroads
From a different vantage point, Nvidia’s P/S ratio echoes Oracle’s position in the lead-up to its 2001 turmoil.
ORCL PS ratio; data by YCharts.
This similarity should warrant reflection for any Nvidia enthusiast. Put simply, the current steep valuation of the stock necessitates a degree of moderation.