A powerful investing lesson lies hidden in the movement of Nvidia this year. As the calendar turned to 2023, the stock was trading at $143 per share. Within fewer than two quarters, it had catapulted well above $300 per share. What could justify a 169% year-to-date return?
- Nvidia’s stock price has increased by 169% in 2023, due to the growing popularity of artificial intelligence (AI).
- The stock is currently trading at a high valuation, but some investors believe that the growth potential of AI justifies the price.
- An old Chinese philosophy can be applied now to Nvidia’s share price and can be used by investors considering a purchase.
Why Did Nvidia Go Up So Much?
When OpenAI launched ChatGPT, the world changed forever. No longer was AI some intangible future technology but all of a sudden it was in our hands, and could be used to answer questions never previously possible.
It soon became apparent how truly disruptive AI could be. It could scan and analyze documents as well as lawyers. It could write marketing messages as well as Fortune 500 Marketing Directors. The applications were limited primarily by our own imaginations of how to use the technology. And quickly investors turned their attention to the big question: who will benefit from AI?
It became clear that one company was essentially a toll road for AI applications: Nvidia. The chips made by Nvidia are crucial to the future of AI and smart investors jumped on the trend, and never stopped buying.
The momentum behind the move and the potential for AI to form a secular trend has caused one billionaire, Stanley Druckenmiller, to muse whether Nvidia would drop even if the market as a whole had a big fall. To be clear, he wasn’t saying Nvidia would be immune; his point was that in the past Nvidia, with its lofty multiples, would certainly be taken out to the woodshed and chopped but now it’s less certain because of how explosive AI could become.
How A Chinese Philosophy Can Help You Trade Nvidia
By no metric can it be argued now that Nvidia is cheap. It’s trading at really lofty multiples. The P/E ratio is 177x, for example.
A valuation analysis reveals fair value to sit at $209 per share, a full 32.8% below where the share price currently sits. Even Wall Street analysts have a consensus target of $288 per share. And that’s after they are factoring in the thematic bullishness stemming from AI. So, it’s simply not possible to build a quantitative argument that Nvidia is a value buy right now. But narrative can propel a stock to ever higher multiples.
The problem for investors now is the price has run so much it’s not feasible to build a case to buy but who would dare short a stock with so much momentum?
It’s the precise moment where the fear of missing out on an opportunity rises to peak levels. That in turn compels those with what Warren Buffett describes as “poor temperament” to jump in and buy. But it’s precisely at this time a philosophy from China can help you think about when is best to invest.
Sage wisdom from the East says that everything is cyclical. Or another way of saying that is nothing lasts forever. No share price movement continues linearly forever. Always a pause and reversal occurs. You simply have to trust the logic of the ages and be patient. No matter how far a stock goes from pricy to expensive, you need to be disciplined and remember, this too shall pass.
If you traded Affirm or Upstart, or any of the in vogue stocks in 2020-21 that soared to the moon and subsequently crashed by as much as 90% and more, you already know the lesson. Older investors will remember the technology boom and bust of the late 1990s and early 2000s, and the real estate boom and bust in 2006-09. The timeless lesson is valuation will act as a magnet in the end, and until then it’s best to be patient.