BREAKINGVIEWS-A real market frenzy would send Nvidia even higher

By Robert Cyran

NEW YORK, July 9 (Reuters Breakingviews) - Nvidia NVDA.O won the race to a $4 trillion valuation, becoming the first company to surpass the threshold on Wednesday. It did so with extraordinary speed, lifted by a boom in artificial intelligence that made its chips indispensable. Historically, faster-rising stocks are more likely to crash. But how far rational or irrational exuberance might endure is uncertain. If investors were to reach a frenzy equal to the dot-com bubble, matching Cisco Systems’ CSCO.O peak valuation multiple, Nvidia would be worth nearly four times as much.

The company led by Jensen Huang has already seen its stock roughly quadruple over the past two years. Yet it’s not obviously expensive relative to the very real boost to the business from AI. Its shares trade at about 34 times expected earnings over the next year, according to LSEG data, far less than, say, carmaker Tesla TSLA.O.

Earnings should surpass $100 billion this year, according to estimates, around 165 times more than a decade ago. Moreover, tech giants like Amazon.com AMZN.O and Microsoft MSFT.O, as well as startups capable of gigantic fundraising like OpenAI, are racing to build data centers filled with Nvidia gear. The strain is apparent, but as long as builders are rewarded with more revenue and higher valuations, they will probably continue.

The question is whether these rewards evaporate. Harvard researchers concluded that sharp rises in stocks, defined as an industry’s shares more than doubling over two years, didn’t predict future returns - but did indicate higher odds of a crash. It makes sense: as the velocity of share price appreciation increases, the explanation that merits it must become more exceptional. If the future disappoints, stocks tumble.

Skeptics can lose their shirts by expecting a collapse too early. Networking company Cisco enjoyed a similar rise in the late 1990s, as the world wired itself for the internet. Boss John Chambers said revenue could grow 50% annually for “the long run.” Its share price soared to 130 times estimated earnings, according to JPMorgan. If Nvidia attracted a similar multiple it would be worth over $15 trillion today.

Subsequent single-digit revenue growth resulted in a roughly 90% stock wipeout for Cisco. The Harvard paper does point to signs that increase the risk of a crash, including higher volatility and disproportionate price rises among newer firms. As the market for initial public offerings hums back to life, it’s a potential guidepost for divining when the AI frenzy has reached truly ludicrous levels.

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CONTEXT NEWS

Nvidia’s market capitalization reached $4 trillion in early-morning trading on July 9, making it the first company to reach this threshold.

The designer of semiconductors that are widely used in data centers and for the training of artificial intelligence has seen its stock rise 18% in the year to date, and 287% in the past two years.