Last week Nvidia released its quarterly earnings to much fanfare (including this Nvidia earnings watch party in NYC). However, despite beating Wall Street’s expectations yet again, the stock declined as much as 5% in after-hours trading.
For some context, Nvidia became the 2nd most valuable company in the world (at ~$3 trillion) because of the AI revolution. Following the release of ChatGPT in November 2022, the demand for AI/LLMs (large language models) exploded. This meant more data centers and more computing power.
The backbone of all of this additional compute comes from GPUs (graphical processing units). That’s what Nvidia produces and it produces them better than anyone else. As a result, the demand for their GPUs went through the roof.
Today, many of the largest tech companies are spending a sizable portion of their total capital expenditures on Nvidia’s GPUs. For example, Microsoft spends nearly 40 percent of their total capital expenditures on Nvidia, up from less than 10% about a year ago. You can see just how much money many of the tech giants are sending to Nvidia in this chart from Yahoo Finance:
This explains why Nvidia has 80% to 95% market share in AI computing.
But it’s not just their total market share that matters, but their growth. As this chart from Yahoo Finance illustrates, Nvidia’s data center revenue is up 6x over the prior five quarters:
When you combine this incredible growth in revenue with their near monopoly on GPUs, you get a stock that is up 150% YTD.
But as impressive as Nvidia’s growth has been, I’m here to tell you that its valuation is out of control.
To provide some context for this statement, let’s look at the Price-to-Sales (P/S) ratio of Nvidia today compared with Microsoft’s P/S ratio during the DotCom
