Things Never Change

"It is not worth while to try to keep history from repeating itself, for man's character will always make the preventing of the repetitions impossible" Mark Twain.

There's nothing like a boom in a particular section of markets to get hearts racing, investors pouring in and typically for immense gains to be had then subsequently lost as sentiment falls.

Alone in the time I've been investing examples off the top of my head include:

1. Buy Now Pay Later
2. Lithium
3. Coal
4. Iron Ore
5. Technology (I'm calling this a broad base as it's easier) but in particular unprofitable software
6. Rare Earths
7. The high flying cannabis stocks (sorry, I couldn't help but make that pun)

The current factor/topic/industry of the moment is anything related to Artificial Intelligence (A.I.) and the expected boom over the coming years. When you start seeing furniture retailers making market announcements about using A.I. to sell couches, you know that the market/investors are frothing for anything related to sector. It wasn't that long ago that many company's were making similar announcements about utilising blockchain or saying ridiculous things like "we are studying to see the affect of eating avocado on transmission of Covid-19".

I'm going to make a couple of obvious statements here:

1. A.I. is going to transform parts of the world and the economy
2. There is almost certainly going to be immense amounts of money spent in this industry for the foreseeable future
3. The underlying technology is far beyond my comprehensive ability. I have a better chance of reading hieroglyphs than the code involved in half these models.
4. More computing power and data will require better/more powerful chips, more storage and the industry moves rapidly with innovation.

The posterchild of this rush at the moment can be seen in the share price movements of Nvidia. Now I need to make this clear, blindingly clear, I have not researched Nvidia extensively, I've never directly purchased their products and I have no thoughts on the quality of the company/management or potential. In fact, I'm only had what could best be described as a cursory glance over the headline numbers. The rough numbers at time of writing are below:

P/E - 200

P/S - 40

Revenue - $27 Billion vs a market cap of $990 Billion

Simply put, there are some incredibly high expectations that are baked into this stock price. Let's make a couple of assumptions here.

1. In 20 years revenue will grow the point where the business is valued at 3x sales.
2. The market capitalisation doesn't increase

In order to grow annual revenue to $300 Billion per year the company will need to compound revenue at a whopping 48% per year, each year for 20 consecutive years. Now this is not impossible, Monster Energy Drinks were able to grow a rate that equated to roughly 100% per year for 20 years but it was coming off a revenue base of sub $100 million not an existing level of $27,000,000,000.

Now believers in efficient markets and from the train of thought that market participants will accurately price all available information into a stock price will tell me that the company is fairly priced and that growth assumptions priced have moved the stock to an appropriate level.

I disagree, not because I am an expert in the fields of business that Nvidia operates in/a master of A.I./the smartest stock analyst you have ever met or any reason like that at all. My argument as to why this stock price is almost certainly silly is simple, to justify this stock valuation you need to make the following assumptions in order to get a decent long term rate of return:

1. The company will maintain an astronomical growth rate for an incredibly long period of time
2. The company has such a large advantage (moat) in the space that it operates in that competitors will not be able to muscle in
3. The company's future does not have a single hiccup in the future
4. Profit margins are going to be high for the foreseeable future
5. Management doesn't make any mistakes
6. Competition doesn't arrive from other global giants that have the cash, reasonable levels of experience and the motivation to enter what is highly like to be both a growing and globally important industry.

At a headline glance, this appears to be aggressive assumptions. Just for a little context Cisco can be viewed as a indicator for the 90s tech boom (and insanity) went from a P/E of nearly 200 times to sub 20x, and the stock has certainly been a poor performer for those who bought at the peak of the insanity and held.

As I've said previously, I have done no more research into this business than a cursory glance over the numbers and seeing how the share price has moved, so you really shouldn't take anything in this piece as any form of investment advice.

But I am going to leave this with a quote I've used many times before and will probably keep quoting until I'm either grey or bald.

"At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?"

Cheers,

Tyso

*As I have said multiple times, I have done no real research on any stock mentioned in this. You should not trade or invest based on anything I have said in this piece and it most certainly is not financial advice in any shape or form"