English speakers have an expression to describe the fear of missing out: FOMO. For the past few months, an incredible number of investors have been obsessed with the stock of artificial intelligence giant and chipmaker Nvidia.
An impressive number of people close to me talk to me about it as if it were the Holy Grail of investing and that it would be a serious mistake to miss out on an opportunity that may never come again.
This acute FOMOite seems to affect investors with limited stock market experience, often from the 2020-2021 vintage, who spend little time analyzing stocks and who invest based on their intuition. I hope the following arguments will generate some reflection among investors who expect to hit a home run by investing in this flavor of the day.
Let’s be clear. I’m not saying that Nvidia isn’t a great company. Unfortunately, there’s a huge difference between a great company and a good investment. It all comes down to the price you pay for the company’s future profits.
As of September 2022, Nvidia’s market capitalization was already appreciable and reached approximately US$300 billion. In less than 22 months, the stock’s value has exploded and increased 11-fold, now reaching over US$3.4 trillion. The problem with this type of progression is that the law of large numbers always catches up with us eventually.
Did you know that combined, the U.S. stock markets are worth just over $54 trillion?
Don’t kid yourself, I can guarantee you that the future progression of the stock will be considerably lower than in recent months; Nvidia mathematically cannot become bigger than the market.
Please, let’s remain rational. As of June 20, no company had a higher market capitalization than Nvidia.
As Martin St-Louis would say, the stock market is a game of expectations. Market expectations for Nvidia are spectacular and its current price reflects flawless future execution. Morningstar expects compound growth of 29% per year over the next decade.
Using 2024 earnings per share as a starting point, it should reach over $165 by 2034. Expectations for 2025 are around $27 per share, a whopping 110% increase. What happens if future growth doesn’t meet the market’s wild expectations?
As always, the madness will fade and the newest investors will still be the big losers… until the next flavor of the day.