Yes, you live in an Nvidia-led technology bubble

By | February 25, 2024

This is The Takeaway from today’s Morning Brief, that’s possible to register to receive in your inbox every morning, along with:

Getting old sucks, and I don’t like it at all.

My hair is thinning. I don’t wake up at 1:45 am every day with the same fiery energy to obsess over markets and stocks. I eat red meat three times a month, “just because” people have told me it’s the right thing to do at this point in life.

As far as I can see, one of the only positives of growing old is experience.

And my experience analyzing and reporting on markets and leaders for more than a decade tells me that investors have become fully enmeshed in an AI-powered technology bubble.

To be honest, this feels like a very different bubble than the cannabis and crypto stock bubbles of years gone by, as tech giants like Nvidia (NVDA) and Microsoft (MSFT) have real money-making business models. Their leaders are not inexperienced dopes either (see the cryptosphere’s bad actors of the past two years).

But make no mistake: we are in a bubble and it could end badly at some point.

Here are some of the elements I see supporting this view.

Everything is moving, but is that necessary?

Nvidia shares soared 15% higher last Thursday after earnings reports. The report also lifted the broader market.

Nvidia rivals AMD (AMD) and Arm (ARM) saw strong bidding. The newly popular Yahoo Finance ticker Super Micro Computer (SMCI) exploded 36%. Even Intel (INTC) got some Nvidia tailwinds. And shares of Meta (META), which led the way in buying Nvidia chips, also shot higher.

Doesn’t this all look insane and like blind buying by FOMO traders?

In a normally functioning market, Nvidia is doing surprisingly well, which is bad news for competitors like AMD and Intel. Nvidia sells more chips, which means fewer sales opportunities for rivals. Shouldn’t their shares fall?

How will Meta owning and using some new Nvidia chips positively impact revenues and cash flow over the next four quarters? Will it at all?

The point is that investors are acting irrationally as Nvidia dishes out eye-popping financials and the hype machine descends on social media. It makes sense until it doesn’t, and that’s classic bubble action.

Justifying inflated valuations

Still not convinced this is an AI-powered technology bubble?

Then consider the typical Wall Street move of justifying higher and higher valuation multiples for stocks.

Technology's price-to-earnings ratios are rich.  Is this the creation of an AI-powered bubble?Technology's price-to-earnings ratios are rich.  Is this the creation of an AI-powered bubble?

Technology’s price-to-earnings ratios are rich. Is this the creation of an AI-powered bubble?

“Estimated at 29x our calendar year 2024 [earnings per share]“Nvidia is trading at a lower price than peers Intel and AMD,” one analyst wrote in a note following Nvidia’s earnings rush. “We view the valuation as compelling. Nvidia remains a top choice.”

I’m not saying that Nvidia shouldn’t be valued as a premium in the marketplace – I’m not saying that at all, so don’t shred me via email.

What I’m asking you to do is deconstruct the above commentary, which is increasingly creeping into tech coverage.

The analyst in this case has rationalized that 1) high price multiples for slower growers Intel and AMD are OK because AI is so popular, it seems, and 2) Nvidia’s stock deserves to trade at a roughly 33% premium to from an already rich price-to-earnings ratio on the S&P 500.

Nvidia’s valuation isn’t surprisingly compelling considering earnings expectations have been pushed to the ceiling! This is a technology stock with a price for absolute perfection.

But hey, anything is possible in a technology bubble, right?

Thinking you are unstoppable

Nothing says more about an ‘investment bubble’ than unbridled confidence. It’s that feeling that whatever stock you buy – at whatever price and at whatever time – will only go up forever. This makes you feel like an investing genius and makes you more inclined to take more risks.

Here’s a dose of insight that shows there’s a lot of hubris sweeping through the markets.

Traders’ confidence in their own decision-making, consistent with bullishness, just reached the highest level since Charles Schwab began its Trader Sentiment survey, the financial services company said this week. From an industry perspective, traders are most optimistic about information technology (shocker). They are particularly bullish on AI stocks (shocker).

Newsflash: You are not an investing genius. The best thing you can do now to grow your wealth is to realize that it is time to lay the foundation for protecting your wealth created by the technology bubble.

Trust your investing experience and all its wrinkles.

Brian Sozzi is editor-in-chief of Yahoo Finance. Follow Sozzi on Twitter/X @BrianSozzi and further LinkedIn. Tips about deals, mergers, activist situations or something else? Email brian.sozzi@yahoofinance.com.

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