Time for some grossly oversimplified back-of-the-proverbial-envelope value crunching! I’ll assume the average GPU price, for the sake of argument, is $1000. Let’s also assume their per-unit profit margin is roughly 30% (I found conflicting numbers for this on a casual search, esp. between figures that measure quarterly and annual income, I suppose it isn’t a surprise that their accountants frequently pull rabbits from hats).
Nvidia would need to move on the order of 4,000,000,000 units to hit $4T in revenue, more than triple that to realize $4T in profits. Even if the average per-unit costs are 2-3x my estimated $1k, as near as I’ve been able to tell they “only” move a few million units each year for a given sku.
I am struggling to work out how these markets get so inflated, such that it pins a company’s worth to some astronomical figure (some 50x total equity, in this case) that seems wholly untethered to any material potential?
My intuition is that the absence of the rapid, generationally transformative, advances in tech and industry that were largely seen in the latter half of the 20th-century (quickly followed with smartphones and social networking), stock market investors seem content to force similar patterns onto any marginally plausible narrative that can provide the same aesthetics of growth, even if the most basic arithmetic thoroughly perforates it.
That said, I nearly went bankrupt buying a used car recently, so this is a whole lot of unqualified conjecture on my part (but not for nothing, my admittedly limited personal wealth isn’t heavily dependent on such bets).
NVDA's current forward P/E ratio (price to earnings) is about 37.
That means if we hold constant the profit earnings, if you bought the whole company at its current valuation ($4tr), it would take you 37 years to break even.
Is this reasonable? Depends on sector and growth potential. To me, this is a "fair" valuation and not overly inflated based solely on existing earnings.
37x only makes sense if the growing continues, otherwise better to put the money is a high yield savings account. The big question mark of course is how long that growth can continue for. At the current rate their revenue and earnings are both growing I don't see how that's sustainable long term. But maybe sustainable enough to a point where the current investment can get to a break even in say 15 years.
I can understand that, at least in theory. I feel like this is one of the only contexts where markets accommodate long-term thinking, which frustrates my own sensibilities. Thanks for the add’l perspective.
Fair point, but without an engraved prophecy from a licensed and bonded deity, I probably wouldn't have bought AAPL or MSFT in 1988 either, certainly not with the intent of holding it until 2025. I would have been wrong in some sense, but one has to take on the risks one is comfortable with. I'd rather hold a broad index and focus on other things!
As someone who bought NVDA in 2016/2017 and held till now, I'm very happy with the way I applied my software knowledge to profit where I won't have to work again.
Risk taking is best done in domains where you have an edge!
I bought shares, a sum that I could afford to lose but also a non-trivial amount.
As it went up, I occasionally sold some and took profit, but not much, till now.
I saw how important and productive machine learning was, and it seemed like NVDA had an excellent CUDA moat, so that was my thesis for that bet. In the last couple years I sold some and bought a house.
This is obviously a story with survivorship bias. But anyway my superpower isn't technical knowledge, its the lack of emotion and bias towards non-action when markets tumble. As you probably know, time in the market is better than timing the market.
Doesn't need to be sustainable until 2062 though. It'll take until 2062 to break even if they keep with projected numbers for next year. They can be flat forever after that and it'll still be 37 years to break even. If they maintain the same growth for even 5 years, the break even time shrinks down dramatically.
Nvidia's trailing P/E ratio is 53 (stock hitting a new high today). Its forward P/E ratio is 38.
A year ago both its trailing and forward P/E were higher. So the stock is relatively a bargain compared to what it was a year ago.
The price implies that revenues and profits are expected to continue to grow.
> My intuition is that the absence of the rapid, generationally transformative, advances in tech and industry that were largely seen in the latter half of the 20th-century (quickly followed with smartphones and social networking), stock market investors seem content to force similar patterns onto any marginally plausible narrative that can provide the same aesthetics of growth
DC GPUs from Nvidia are sold at $30-40k per piece. You might want to rethink your calculations.
Nvidia is going to sell >5 million Blackwells this year and will do $200b in revenue with that alone.
Nvidia has a high net profit margin of >50%. If Nvidia would make $4 trillion in revenue then they would have >$2 trillion in net profit. Then the market cap would easily be 5-10x higher than today because otherwise Nvidia would be the cheapest stock in history of all time.
Market cap is also a very bad indicator as it doesn't really tell how much money was really invested into the stock. Market cap is just a product of shares * prices. For example, I bought Nvidia shares in 2016 for a certain amount. These shares are >100x more valuable today but I didn't put any extra money into them. So 99% of "my" market cap was simply created by traders pushing up the stock price.
If tomorrow, the majority of Nvidia stock holders decide to sell and all stocks are sold then I guarantee you that never ever will $4 trillion be traded because if there is a strong sell move then the stock price will drop like a rock and the last sellers will get a fraction of money as they have based on todays market cap. We might be lucky to see $500b of trading volume.
It seems fairly obvious, to me, that the issue is that most people make money from the stock price changing rather than from any kind of intrinisic value of the underlying company.
In other words, why should it matter to me what the company's profit margin or asset base or what not is actually worth when I make money if the stock number goes up?
In the short run, markets are a voting machine; in the long run, they’re a weighing machine. — Ben Graham
If you own a slice of nVidia’s shares at a current P/E of 37, after a year, they’ve earned 2.7% of the value and you still have the same stake as you did before. That’s pricing in further growth and upside in earnings from here (otherwise, you could buy US treasuries at a better price), but doesn’t seem outrageous to me.
Disclaimer: I don’t directly own any $NVDA; I do own mutual funds that own some.
Thing is, NVIDIA ships waaaay more than GPUs. Or, perhaps more accurately, NVIDIA ships chips. Other manufacturers install those chips. Sitting in my office right now, I have 5 computers, and between them I'd estimate I have 15 NVIDIA chips, minimum. Maybe more, I haven't carefully examined my NVIDIA-based, ASUS-manufactured graphics card to see how many name-brand chips it has.
That's to say nothing of all the other products and services they build. I just visited their website, clicked on "solutions" at the top, and there's waaaay more there than just desktop GPUs. And its worth noting that NVIDIA doesn't manufacture or sell any of the down-market NVIDIA-based boards.
Given NVIDIA's role in data centers, I think the 4T market cap is, while probably still somewhat inflated by speculation, not so inflated as to be a bubble ready to pop.
55% net profit doesn't include NRE right? The thing about selling fewer, bigger-ticket items is that the non-recurring engineering costs are amortized over fewer sales. Not to say they aren't printing money, but the unit cost to produce the second GPU pales in comparison to the effort to produce the first one.
How many racks are they selling? Is that 50% of their revenue? 10%? How sustainable will that be? I understand AI will probably continue to grow, but can they continue cornering such a market with 55% margins?
Fortunately, I opted to pivot towards ratio of total equity, the per-unit activity was a very rough attempt at moving away from abstractions, and that is obviously one of the many flaws in such an exercise.
I already noted the profit margins are incredibly unstable, so I don’t trust the reported figures where they quadrupled inside of a decade. I’m not suggesting it isn’t real, only that it isn’t possible to pin that 55% down as sustainable for any significant period of time, certainly not the 30-50 years is it would take to realize $4T of value at their current pace.
It's close to 90% of their revenue. They will sell about $115B this year, $180B in 2026 and $230B in 2027, with margins staying fairly constant. Their only real competitor is Broadcom, who has slightly worse margin on AI chips.
So my broader argument is that their current performance isn’t a reliable indicator for the future, as so much of their current position is circumstantial. Any investments that rely on their sustaining this sort of performance are inherently flawed as a result.
For the record, most recent graphics revenues were $14.3B, with $116B in compute/networking. [1]
So quite lopsided. That curtails my expectations even further, as this represents a lot of initial infrastructure investments whose long-term expenditures (and viability) remain to be seen.
The market price is supposed to account for future growth, not just for current revenue. Predicting future is speculative by definition, but it's not completely detached from reality to bet that Nvidia has the potential to grow significantly for some time (at some point either the market cap or the multiple will correct of course).
I also see where the reasoning here contradicts the reality. If we assume Nvidia only sells $1000 gpus and moves a few millions a year, then how did it received $137B in FY2025? In reality they don't just sell GPUs, they sell systems for AI training and inference at insane margins (I've seen 90% estimates) and also some GPUs at decent margins (30-40%). These margins may be enough to stimulate competition at some point, but so far those risks have not materialized.
It’s not unreasonable to bet that their 60% margin on data center products disappears either though. It only takes one competitor to get their act together and those margins will be cut in half.
>I’ll assume the average GPU price, for the sake of argument, is $1000.
They make big bucks on the premium end of their chips. Those contracts are typically on the 8-figure range, I would think they easily have thousands of them around the world.
Even Jensen has implied[1] that the consumer GPU market (i.e. gaming) holds a minor share of revenue these days.
1: Citation needed, I know. I mean comments like "we are not going to abandon gamers, etc...".
Nvidia's revenue is $44 billion in the last quarter. It's been growing at 5 billion a quarter. With a 50% profit margin. It is the most profitable company in the world; just take a look at the fiscals.
If that justifies the valuation or not, your guess is as good as mine.
Yeah, but their AI/data center GPUs go for closer to $100K, and I've heard that they obtain >50% margins on those. I agree with your overall point that the $4T valuation is not justified by current profits.
Nvidias business is about data center now. The data center gpu’s sell for 50k+ each and have unit margins over 70%. They’re making truly fuckloads of money off the AI boom.
Nvidia would need to move on the order of 4,000,000,000 units to hit $4T in revenue, more than triple that to realize $4T in profits. Even if the average per-unit costs are 2-3x my estimated $1k, as near as I’ve been able to tell they “only” move a few million units each year for a given sku.
I am struggling to work out how these markets get so inflated, such that it pins a company’s worth to some astronomical figure (some 50x total equity, in this case) that seems wholly untethered to any material potential?
My intuition is that the absence of the rapid, generationally transformative, advances in tech and industry that were largely seen in the latter half of the 20th-century (quickly followed with smartphones and social networking), stock market investors seem content to force similar patterns onto any marginally plausible narrative that can provide the same aesthetics of growth, even if the most basic arithmetic thoroughly perforates it.
That said, I nearly went bankrupt buying a used car recently, so this is a whole lot of unqualified conjecture on my part (but not for nothing, my admittedly limited personal wealth isn’t heavily dependent on such bets).