NVIDIA: Largest one-day drop for a U.S. company in history - $279 billion

Bad on a one-day time horizon, very different when zooming out.

The "Magnificent Seven" U.S. tech companies have experienced a rollercoaster ride in 2024, with both impressive gains and notable setbacks.

The Magnificent Seven's combined market cap reached $16.6 trillion by mid-2024, up from $11.79 trillion in January. This collective value now exceeds the entire market value of many other industries, including automotive, healthcare, and energy sectors.

Despite the overall positive trend, the Magnificent Seven have faced periods of volatility:

1. There were concerns about potential overvaluation, with some analysts drawing parallels to the dot-com bubble.

2. The tech sector showed sensitivity to economic indicators, with recession fears in early August triggering a brief but sharp global stock selloff.

3. Tesla experienced a significant decline, becoming the biggest laggard among the group. Its earnings fell 40% year-over-year in Q4 2023, leading to speculation about its position within the Magnificent Seven.

NVIDIA has been the standout performer, with its stock value skyrocketing by 160% in the first six months of 2024. This growth, driven by the company's dominance in AI chip production, added a remarkable $1.9 trillion to its market cap.

Its stock skyrocketed by 150% this year, making it the second-best performer in the S&P 500. This astronomical rise was fueled by optimism surrounding the company's pivotal role in driving the artificial intelligence revolution, particularly NVIDIA's dominance in the AI chip market, where it holds an 80% share.

The company reported stellar second-quarter results, with revenue doubling year-over-year to over $30 billion.

Despite its strong earnings report, NVIDIA experienced a significant selloff on September 3, 2024:

• The stock tumbled 9.5% in a single day.

• This decline resulted in a staggering $279 billion loss in market value, marking the largest single-day drop for any U.S. company in history

While the sell off was huge, zooming out and taking a broader perspective, the company is still well up on the year and trading at valuations that many still struggle to justify.

Parallels can be drawn between NVIDIA today and Microsoft in the year 2000. Both companies were/are leaders in their respective technological revolutions. Microsoft was at the forefront of the personal computer and internet boom, while NVIDIA is leading the AI revolution, so what might NVIDIA shareholders learn from history?

Despite being a great company, Microsoft was hugely over valued as the share price had run years ahead of its underlying unit economics. NVIDIA's stock has seen a meteoric rise, reminiscent of the rapid appreciation tech stocks such as Microsoft experienced during the dot-com boom. The Microsoft share price subsequently corrected when the dot com bubble burst. Both eras are characterized by a belief in a new technological paradigm. The dot-com era was driven by the internet revolution, while today's market is fueled by AI advancements. If a correction occurs, it could take years for NVIDIA stock to recover, similar to Microsoft's 15 year journey to regain its 2000 peak (despite its top and bottom lines continuing to expand throughout the period). It was a dreadful decade and a half for investors in Microsoft. Essentially, at the wrong price even the best company can be an awful investment.

NVIDIA shareholders should take note. NVIDIA's current price-to-sales (P/S) ratio is higher than Microsoft's was at the peak of the dot-com bubble, although NVIDIA is significantly more profitable than many dot-com era companies, including Microsoft at that time. NVIDIA's business model and financials are more robust. NVIDIA's products, particularly its GPUs for AI applications, are in high demand from established tech giants. Microsoft, for instance, is today spending nearly 40% of its CAPEX on NVIDIA products.

However, NVIDIA's growth is heavily tied to the AI boom. Any slowdown in AI adoption or emergence of strong competitors could impact its valuation. The curbs on exports of state-of-the-art GPUs to China by the U.S. will certainly spur Chinese companies to invest heavily in building their own, which will almost certainly then be exported. Intel is also trying to claw its way back into this market, not to mention all of the other global companies investing very heavily in this space. Finally, there is the much anticipated arrival of quantum computing which may entirely supplant CPU and GPU technology. In a fast moving industry where nothing stays the same, change is the only thing that can be guaranteed.

Conclusion

While the Magnificent Seven have shown remarkable growth in recent years, their dominance raises questions about market concentration and potential risks. Investors are likely to continue scrutinizing these companies' valuations, balancing their growth potential against broader economic factors and the sustainability of the AI boom that has fueled much of their recent success.

NVIDIA in particular still looks vulnerable to further corrections, which could explain why its CEO, Jensen Heung, has been selling huge tranches of his own shareholding in recent weeks (often $20 million per day according to recent filings).