WEBVTT - Here's Why Nvidia Is So Hard To Price Right Now 0:00:02.440 --> 0:00:08.960 Bloomberg Audio Studios, podcasts, radio news. 0:00:09.240 --> 0:00:11.799 I'm Stephen Carol and this is Here's Why, where we 0:00:11.840 --> 0:00:14.080 take one news story and explain it in just a 0:00:14.080 --> 0:00:14.880 few minutes. 0:00:14.640 --> 0:00:16.360 With our experts here at Bloomberg. 0:00:19.640 --> 0:00:22.520 The artificial intelligence wave has boosted the value of tech 0:00:22.560 --> 0:00:25.680 companies around the world this year, but one firm has 0:00:25.760 --> 0:00:26.840 surpassed them all. 0:00:27.240 --> 0:00:28.920 Video video. 0:00:29.120 --> 0:00:31.720 The surge in demand for in videos highly sought after 0:00:31.840 --> 0:00:34.240 chips is made at the hottest stock on Wall Street, 0:00:34.640 --> 0:00:37.159 and on the eighteenth of June, the rally propelled it 0:00:37.200 --> 0:00:40.120 to the title of the world's most valuable company. 0:00:40.240 --> 0:00:42.760 When Vidia has more than double, more than triple the 0:00:42.840 --> 0:00:45.599 year to date, it's astounding right now, three point three 0:00:45.640 --> 0:00:48.400 to five trillion dollar market value. It's added two point 0:00:48.479 --> 0:00:51.400 one trillion dollars in market value this year. That's more 0:00:51.400 --> 0:00:54.520 than Amazon, that's more than Meta, that's more than Berkshire Hathaway. 0:00:54.680 --> 0:00:57.200 But just days later, the stock price plunged. 0:00:57.680 --> 0:01:00.800 The only thing that everyone is talking about is in video. 0:01:00.880 --> 0:01:02.480 It follows three straight days. 0:01:02.200 --> 0:01:05.480 Of declines which total more than ten percent, So therefore 0:01:05.600 --> 0:01:08.880 technical correction in just three days of trading, four hundred 0:01:08.880 --> 0:01:12.039 and thirty billion dollars was wiped off the AI chip 0:01:12.080 --> 0:01:15.759 giants market cap. It was the biggest value loss over 0:01:15.800 --> 0:01:18.840 that period for any company in history, and the whole 0:01:18.880 --> 0:01:21.759 episode has left analysts scratching their heads as to. 0:01:21.800 --> 0:01:24.440 How much the tech giant should really be worth. 0:01:24.880 --> 0:01:29.560 I think it's really difficult to really ascertain what the 0:01:29.600 --> 0:01:34.040 total addressable market really is for artificial intelligence. 0:01:34.319 --> 0:01:37.480 So here's why in Vidia is so hard to price 0:01:37.720 --> 0:01:38.119 right now. 0:01:38.240 --> 0:01:40.520 Joining u STAT to discuss is Matt Turner, who leads 0:01:40.520 --> 0:01:44.080 Bloomberg's US equities coverage. Matt, great to have you with us. 0:01:44.400 --> 0:01:46.959 So the standard way that we think about valuing firms 0:01:47.000 --> 0:01:50.600 is on price to earnings share prices versus earnings per share. 0:01:50.360 --> 0:01:52.120 But that's tricky for in Vidio. 0:01:52.280 --> 0:01:55.680 Why Yeah, it's very difficult for Nvidia in the sense 0:01:55.760 --> 0:01:58.400 that the company itself has really transformed itself in the 0:01:58.440 --> 0:02:00.000 last couple of years. So if we want to take 0:02:00.040 --> 0:02:03.640 a step back, was primarily selling these GPUs to power 0:02:03.880 --> 0:02:06.559 computer graphics sort of was used in the crypto space 0:02:06.600 --> 0:02:09.040 back in the twenty twenty one twenty twenty two days, 0:02:09.080 --> 0:02:11.480 and now it's obviously it's been flipped into the generative 0:02:11.520 --> 0:02:14.480 AI name that everybody's looking at, and that has really 0:02:14.520 --> 0:02:17.639 led to explosive growth in the company's sales, and that 0:02:17.720 --> 0:02:20.440 creates a headache for analysts and for the company itself 0:02:20.480 --> 0:02:22.679 in terms of projecting what they're going to make on 0:02:22.720 --> 0:02:24.919 a quarter by quarter basis, And so you have to 0:02:24.960 --> 0:02:26.840 look at the company now and you also have to 0:02:26.880 --> 0:02:28.200 look at where it's going to be in a year 0:02:28.280 --> 0:02:30.720 and two years and three years, and that's very difficult 0:02:30.760 --> 0:02:34.320 to do for a market like the AI industry, which 0:02:34.520 --> 0:02:36.120 I don't know if we want to say that it's new, 0:02:36.200 --> 0:02:38.760 but it's definitely become the hottest thing right now, and 0:02:38.840 --> 0:02:41.000 so it creates a headache for how big it's going 0:02:41.080 --> 0:02:43.080 to be, how fast it's going to grow, and analysts 0:02:43.120 --> 0:02:46.239 are sort of grappling with how to create those projections. 0:02:46.240 --> 0:02:48.760 Sometimes they look at historical growth for the company, and 0:02:48.800 --> 0:02:51.280 for Nvidia that has a thirty year history, this is 0:02:51.400 --> 0:02:54.000 completely different than any think it's ever really seen outside 0:02:54.000 --> 0:02:56.120 of its early days of growth. So it's just like 0:02:56.160 --> 0:02:58.560 a very difficult time to see is this going to 0:02:58.600 --> 0:03:00.760 continue or is it going to flat now, or even 0:03:00.840 --> 0:03:02.800 you know, is it going to taper off and start 0:03:02.800 --> 0:03:03.399 to decline? 0:03:03.760 --> 0:03:05.280 Yeah, I mean, certainly, even if you think about the 0:03:05.320 --> 0:03:08.240 conversations we are having about AI just six months ago, 0:03:08.320 --> 0:03:13.000 even that seems completely transformed. How are analysts putting a 0:03:13.040 --> 0:03:15.040 price range on Nvidia at the moment. 0:03:15.680 --> 0:03:17.280 Some of the ones that we've talked to have said 0:03:17.280 --> 0:03:19.040 that there's, for lack of a better word, they're ballparking 0:03:19.080 --> 0:03:21.520 it right. They're looking at the company's own guidance, where 0:03:21.520 --> 0:03:23.840 the company will give projections for their revenue and they'll 0:03:23.840 --> 0:03:26.040 say we're going to make twenty four billion dollars next 0:03:26.120 --> 0:03:28.440 quarter roughly, and analysts will take that and they'll say, 0:03:28.760 --> 0:03:30.760 we think that they will make around that, but based 0:03:30.800 --> 0:03:33.480 off of their last few quarters, they're adding two three 0:03:33.600 --> 0:03:35.640 four billion dollars on top of that because they're not 0:03:35.680 --> 0:03:39.440 even sure the supply and demand for the chips themselves 0:03:39.560 --> 0:03:42.120 is as I said, it's explosive at this point, and 0:03:42.200 --> 0:03:44.839 so they're basically looking at that and they're trying to guess, 0:03:44.920 --> 0:03:46.840 are we going to be fifteen percent above what the 0:03:46.880 --> 0:03:48.640 company thinks? Are we going to be in line with 0:03:48.680 --> 0:03:50.400 what the company thinks? And if you look at the 0:03:50.480 --> 0:03:54.040 last five quarters, the company itself has undershot its own 0:03:54.160 --> 0:03:57.040 sort of sales that it's reported by about thirteen percent, 0:03:57.120 --> 0:03:59.040 which is big You look at a company like Apple 0:03:59.120 --> 0:04:01.640 or Meta and Fai Book and they typically beat or 0:04:01.680 --> 0:04:04.240 miss their own guidance by about two percent. So compare 0:04:04.280 --> 0:04:06.920 that to a thirteen percent beat or miss rate, it's 0:04:06.960 --> 0:04:10.040 a pretty massive gap, especially for a company the size 0:04:10.040 --> 0:04:10.560 of Nvidio. 0:04:10.600 --> 0:04:12.880 At this point, Yeah, I mean, it sounds like a 0:04:12.920 --> 0:04:15.040 gasing game, an educated gasing game, but a bit of 0:04:15.040 --> 0:04:17.800 a gas Nonetheless, we're a couple of days out from 0:04:18.000 --> 0:04:19.880 that massive share price drop. 0:04:20.520 --> 0:04:23.280 Was that linked to the difficulty of valuing in video? 0:04:24.279 --> 0:04:25.160 It's difficult to say. 0:04:25.200 --> 0:04:28.279 I mean, I would say yes, analysts and investors and 0:04:28.320 --> 0:04:31.480 fund managers are all questioning how to value the stock 0:04:31.520 --> 0:04:33.480 and has it gotten too big? But you look back 0:04:33.480 --> 0:04:35.719 a couple of years in Video was a five hundred 0:04:35.720 --> 0:04:37.760 billion dollar stock, which, don't get me wrong, that's a 0:04:37.839 --> 0:04:41.400 very large company relatively speaking, but becoming from five hundred 0:04:41.400 --> 0:04:44.240 billion to the world's largest company at over three trillion, 0:04:44.400 --> 0:04:47.520 and people are questioning whether it's worth that the price decline. 0:04:47.560 --> 0:04:49.280 A lot of it from people that we've talked to, 0:04:49.560 --> 0:04:51.520 is because of that. People were getting worried whether it's 0:04:51.560 --> 0:04:53.640 gotten ahead of itself in terms of the run up, 0:04:54.000 --> 0:04:56.599 whether it can when the future make enough money and 0:04:56.640 --> 0:04:58.880 sell enough of these chips to back up the three 0:04:58.920 --> 0:05:01.640 trillion valuation it was at. In the last few days, 0:05:01.800 --> 0:05:03.840 investors got nervous as to whether or not they were 0:05:03.839 --> 0:05:05.160 going to be able to live up to that sort 0:05:05.160 --> 0:05:07.360 of hype. So that's sort of why we saw the 0:05:07.760 --> 0:05:08.880 pullback in recent days. 0:05:09.080 --> 0:05:11.240 So to make an ai and onogy, then how are 0:05:11.480 --> 0:05:16.880 analysts learning and projecting about how in Video's stock price 0:05:16.920 --> 0:05:19.359 will look in the future. What sort of clues the 0:05:19.480 --> 0:05:22.320 forward price to earnings ri cio give us as to 0:05:22.360 --> 0:05:24.080 what might be the future direction of the stock. 0:05:24.760 --> 0:05:26.880 Yeah, I mean they will use it to try and 0:05:26.880 --> 0:05:29.720 project out Right now it's trading around it's a forty 0:05:29.760 --> 0:05:32.440 times multiples. That's something that analysts will use to compare 0:05:32.440 --> 0:05:35.880 it to itself versus history. They'll compare it to other companies, 0:05:35.960 --> 0:05:37.320 and one of the things that we hear from a 0:05:37.360 --> 0:05:40.240 lot of people is that's expensive relative to most companies 0:05:40.360 --> 0:05:42.760 on the S and P five hundred. They will essentially 0:05:42.839 --> 0:05:44.760 look at that and say, can it trade at a 0:05:44.800 --> 0:05:46.360 higher level than this? Can it trade it at eighty 0:05:46.360 --> 0:05:48.440 times earnings? Can it trade it one hundred times earnings? 0:05:48.440 --> 0:05:49.960 And then they'll look at the price and they will 0:05:50.000 --> 0:05:52.560 sort of extrapolate that out. They will essentially put their 0:05:52.560 --> 0:05:54.480 price targets on it and say, we think that this 0:05:54.520 --> 0:05:57.520 could trade it sixty times earnings, which equals a, for example, 0:05:57.560 --> 0:06:00.400 a two hundred dollars price target, which an analyst recently 0:06:00.400 --> 0:06:02.160 came out in the last few weeks with that exact 0:06:02.200 --> 0:06:04.279 price target, which would put the company at close to 0:06:04.320 --> 0:06:06.640 five trillion in the next year, which is massive. 0:06:07.360 --> 0:06:09.240 It's not that often that we get to reference middle 0:06:09.279 --> 0:06:12.880 age middle age mathematicians maybe, but not mathematicians in the 0:06:12.880 --> 0:06:16.760 middle ages. But I'm talking about Fibonacci, a word that 0:06:16.839 --> 0:06:18.960 some of our listeners may only have heard the Devinci code. 0:06:18.960 --> 0:06:23.280 But I'm wondering how much the Fibonacci retracement level plays 0:06:23.279 --> 0:06:25.400 into this, And if you can explain it for those 0:06:25.400 --> 0:06:26.000 that don't know. 0:06:26.279 --> 0:06:30.760 Sure, Yeah, it is a very complicated math formula that 0:06:30.800 --> 0:06:32.760 I will not try to explain, but at its core, 0:06:32.880 --> 0:06:35.880 it's something that traders and analysts use to sort of 0:06:36.040 --> 0:06:38.839 analyze price moves. They look at it and they tend 0:06:38.880 --> 0:06:42.279 to say these levels correspond with what they would consider support. 0:06:42.320 --> 0:06:44.039 So if the stock is falling, they will look at 0:06:44.080 --> 0:06:46.560 one of these so called retracement levels, and they will say, 0:06:46.560 --> 0:06:48.400 you know, we think that the stock is going to 0:06:48.720 --> 0:06:51.719 reach this level, and then investors will, based off of history, 0:06:51.760 --> 0:06:54.680 based off of other technical analysts viewpoints, they will say 0:06:54.680 --> 0:06:57.000 that the stock is going to bounce off of that level. 0:06:57.240 --> 0:07:00.440 And that's actually something that we've seen within video stock itself. 0:07:00.440 --> 0:07:02.360 You see it with a lot of other stocks. Again, 0:07:02.400 --> 0:07:06.120 technical analysis is a hot topic among traders and investors. 0:07:06.120 --> 0:07:08.400 Some people believe that it's really an art form. Some 0:07:08.440 --> 0:07:10.880 people believe that it's just like magic and is not 0:07:11.080 --> 0:07:14.640 very real. It's very divisive among traders, depends on who 0:07:14.640 --> 0:07:16.400 you ask. But if you look at the charts, especially 0:07:16.440 --> 0:07:19.920 within video recently, those retracement levels have acted as support 0:07:20.000 --> 0:07:23.440 levels for the stock, which has lend some credence to 0:07:23.640 --> 0:07:25.760 the validity of using them to project where the stock 0:07:25.840 --> 0:07:26.680 is going to go from here. 0:07:26.800 --> 0:07:28.960 And once again, I realize the Italians can teach us 0:07:28.960 --> 0:07:31.320 so much. Matt Turner, thank you so much for joining us. 0:07:31.320 --> 0:07:34.760 Matt leads our coverage of US equities. For more explanations 0:07:34.800 --> 0:07:37.000 like this from our team of twenty seven hundred journalists 0:07:37.000 --> 0:07:39.280 and analysts around the world, search for Quick Take on 0:07:39.280 --> 0:07:43.600 the Bloomberg website. Or Bloomberg Business App. I'm Stephen Caroll. 0:07:43.720 --> 0:07:46.640 This is here's why. I'll be back with more next week. 0:07:46.840 --> 0:07:47.640 Thanks for listening.