Over the weekend I talked about what I thought the biggest risk to the stock market is at the moment. The action this week confirmed for me that I am on the right track.

If the above looks insane, don’t worry, it’s not you - it is insane.

Over the three days since reporting earnings on Wednesday, Nvidia added over half a trillion dollars in market cap as active managers chased it and the retail investor got excited about a 10-for-1 stock split happening in June. It appears to be on its way to a $3 trillion market cap. It’s one of the fastest growing companies in the world right now (by revenue and earnings) and it’s also one of most profitable businesses of all time (50% margins - not normal for a component supplier). So of course the stock is up a lot.

Don’t get me wrong - as a long-time shareholder in the name, I’m thrilled.

But it’s starting to seem way overdone. Michael and Chart Kid Matt made this graphic below and, well, it’s not the best feeling looking at this thing. Some of these equations just don’t sound right.

Read this part out loud and let the sound of it hit you…

Nvidia is now worth (we’re not including debt, this is just market cap) Alphabet, Home Depot and Disney combined.

Nvidia is worth more than the combined value of Amazon, Walmart and Netflix.

Nvidia is worth more than JPMorgan, Berkshire Hathaway and Meta stacked on top of each other.

Nvidia is worth the same as McDonalds, Pepsi, Salesforce, AMD, Bank of America, Johnson & Johnson, Costco and Proctor & Gamble COMBINED.

Ask yourself, does that sound right to you?

As incredible as this business is - and, acknowledged, it is incredible and I have been telling you so since 2015, thousands of percentage points ago - do we really think it should be the largest corporation on earth? Because that’s where it’s headed so long as it continues its meteoric rise. Should Nvidia be larger than Apple and / or Microsoft?

Prepare to have this debate with yourself because people are losing their minds over this name.

By the way - the risk is not that Nvidia’s share price has to stay up, it’s that the story behind the company’s miraculous earnings growth has to stay intact. A lot of other very large, important growth stories in the stock market are now interwoven with the AI narrative. Any sign of a slowdown will threaten the earnings growth we are expecting for the balance of 2024 and that’ll be correction fuel for sure.

Can You Invest This Way?

On last night’s What Are Your Thoughts, Michael and I debated whether this type of exercise (such and such is bigger than so and so) is a rigorous way to evaluate stocks. Of course it isn’t - but there’s also some benefit to thinking of things this way. There was a moment in 2020 where Zoom had a higher valuation than Exxon - crude oil barrels were selling for a negative number (look it up) temporarily and the stock market was acting as though no one would ever have an in-person meeting again. In hindsight, it was an obvious top / bottom for work-from-home and energy stocks. There was a moment in 2011 where the GLD gold ETF had more dollars invested in it than SPY, the S&P 500 ETF. In hindsight, that was a generational top for gold and an obvious buying signal for US equities. Obvious today, not then.

(audio version here)

We will look back on the graphic above and say “That was the moment Nvidia got completely out of control?”

I don’t have enough conviction to say definitively Yes. I will say probably. I’m not selling though.

Okay, I have to run 3.5 miles tonight through Central Park for charity. God have mercy. Talk to you soon! I hope! - JB