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Nvidia disconnects from technology stocks on Bitcoin rally and AI hype
Peter Garnry
Chief Investment Strategist
Summary: Nvidia is a fantastic company with an incredible product but this year's rally in Bitcoin because of animal spirits earlier this year and recently the banking crisis has helped fuel the outlook and the share price up 79% year-to-date. The recent version of ChatGPT and comments from Bill Gates that the technology will change the world forever have also helped lift sentiment as these large language models behind ChatGPT are trained using ultra-fast GPUs such as those from Nvidia. Despite the rosy outlook investors are getting ahead of themselves and Nvidia's valuation is now significantly detached from technology sector posing a risk to investors.
A puzzling winner from the banking crisis and dangerous valuation
Nvidia shares are up 79% this year rallying initially with the rise Bitcoin and other high beta technology stocks such as Tesla. From the past we know that there is a strong link between Bitcoin and Nvidia as the company’s GPUs are used in Bitcoin mining and there is a consistent lag from falling or rising Bitcoin prices into the both the share price and revenue of Nvidia. The company itself has never acknowledged this link and refuse to talk about.
The banking crisis over the past two weeks has added more momentum to Bitcoin and for the first time since the launch of Bitcoin the community has a brewing crisis in the deposit system which is used to argue that it is more safe to have money in Bitcoin. Both gold and Bitcoin can at this point be viewed as proxies for the confidence in the banking system and higher Bitcoin prices help on mining activity and thus the market is betting on an improving outlook for Nvidia.
Retail investors are significantly overweight Nvidia and technology stocks in general. Besides the rally in Bitcoin, the hype around AI and ChatGPT has also lifted sentiment, but Nvidia’s valuation has been pushed to alarming levels. Nvidia’s 12-month forward EV/Sales ratio is now 20.7x compared to an average of 5.9x for other highly profitable technology companies such as Microsoft, Apple, Alphabet, AMD, and Meta. This spread is a 3.5 times premium over high quality and growing technology companies. The spread to AMD which GPUs are a competing and good product is just dangerous underpinning that investors are getting too excited over Nvidia. We like the company, the technology, and the outlook (more on that below), but investors can pay a too steep a price even for good companies. Remember, equity returns are a function of changing expectations, so further gains in the share price will have to come from lifting already excessive expectations.
The prospects of ChatGPT
The hype around AI and ChatGPT had a small meaningful impact on the share price back in December before declining with the rest of technology stocks. This year the AI hype has extended as the fourth version of ChatGPT got closer (14 March) and this was the next contributing factor to Nvidia’s strong returns. The old version of ChatGPT was impressive but the new version comes with new exciting features such as visual input, which could be uploading a document and ask questions about it. It can even program a small Pong video game in 60 seconds. From the ChatGPT 4 presentation we can also see that it much better in its accuracy across a wide range of topics. The technology has even got Bill Gates to say that it will change our world.
The technology still comes with a large error and thus it is far from perfect and this is where the hype gets too much. Everyone, including us, are excited about ChatGPT, but it is not even close to AGI. But it could bring productivity gains in rudimentary tasks and be our digital assistant which will have some value. Even a new worker title has been invented because of ChatGPT and that is “prompt engineering”.
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