Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: I'm Stephen Carol and this is Here's Why, where we
Speaker 2: take one news story and explain it in just a
Speaker 2: few minutes.
Speaker 1: With our experts here at Bloomberg.
Speaker 2: The artificial intelligence wave has boosted the value of tech
Speaker 2: companies around the world this year, but one firm has
Speaker 2: surpassed them all.
Speaker 1: Video video.
Speaker 2: The surge in demand for in videos highly sought after
Speaker 2: chips is made at the hottest stock on Wall Street,
Speaker 2: and on the eighteenth of June, the rally propelled it
Speaker 2: to the title of the world's most valuable company.
Speaker 3: When Vidia has more than double, more than triple the
Speaker 3: year to date, it's astounding right now, three point three
Speaker 3: to five trillion dollar market value. It's added two point
Speaker 3: one trillion dollars in market value this year. That's more
Speaker 3: than Amazon, that's more than Meta, that's more than Berkshire Hathaway.
Speaker 1: But just days later, the stock price plunged.
Speaker 2: The only thing that everyone is talking about is in video.
Speaker 1: It follows three straight days.
Speaker 2: Of declines which total more than ten percent, So therefore
Speaker 2: technical correction in just three days of trading, four hundred
Speaker 2: and thirty billion dollars was wiped off the AI chip
Speaker 2: giants market cap. It was the biggest value loss over
Speaker 2: that period for any company in history, and the whole
Speaker 2: episode has left analysts scratching their heads as to.
Speaker 1: How much the tech giant should really be worth.
Speaker 2: I think it's really difficult to really ascertain what the
Speaker 2: total addressable market really is for artificial intelligence.
Speaker 1: So here's why in Vidia is so hard to price
Speaker 1: right now.
Speaker 2: Joining u STAT to discuss is Matt Turner, who leads
Speaker 2: Bloomberg's US equities coverage. Matt, great to have you with us.
Speaker 2: So the standard way that we think about valuing firms
Speaker 2: is on price to earnings share prices versus earnings per share.
Speaker 1: But that's tricky for in Vidio.
Speaker 4: Why Yeah, it's very difficult for Nvidia in the sense
Speaker 4: that the company itself has really transformed itself in the
Speaker 4: last couple of years. So if we want to take
Speaker 4: a step back, was primarily selling these GPUs to power
Speaker 4: computer graphics sort of was used in the crypto space
Speaker 4: back in the twenty twenty one twenty twenty two days,
Speaker 4: and now it's obviously it's been flipped into the generative
Speaker 4: AI name that everybody's looking at, and that has really
Speaker 4: led to explosive growth in the company's sales, and that
Speaker 4: creates a headache for analysts and for the company itself
Speaker 4: in terms of projecting what they're going to make on
Speaker 4: a quarter by quarter basis, And so you have to
Speaker 4: look at the company now and you also have to
Speaker 4: look at where it's going to be in a year
Speaker 4: and two years and three years, and that's very difficult
Speaker 4: to do for a market like the AI industry, which
Speaker 4: I don't know if we want to say that it's new,
Speaker 4: but it's definitely become the hottest thing right now, and
Speaker 4: so it creates a headache for how big it's going
Speaker 4: to be, how fast it's going to grow, and analysts
Speaker 4: are sort of grappling with how to create those projections.
Speaker 4: Sometimes they look at historical growth for the company, and
Speaker 4: for Nvidia that has a thirty year history, this is
Speaker 4: completely different than any think it's ever really seen outside
Speaker 4: of its early days of growth. So it's just like
Speaker 4: a very difficult time to see is this going to
Speaker 4: continue or is it going to flat now, or even
Speaker 4: you know, is it going to taper off and start
Speaker 4: to decline?
Speaker 2: Yeah, I mean, certainly, even if you think about the
Speaker 2: conversations we are having about AI just six months ago,
Speaker 2: even that seems completely transformed. How are analysts putting a
Speaker 2: price range on Nvidia at the moment.
Speaker 4: Some of the ones that we've talked to have said
Speaker 4: that there's, for lack of a better word, they're ballparking
Speaker 4: it right. They're looking at the company's own guidance, where
Speaker 4: the company will give projections for their revenue and they'll
Speaker 4: say we're going to make twenty four billion dollars next
Speaker 4: quarter roughly, and analysts will take that and they'll say,
Speaker 4: we think that they will make around that, but based
Speaker 4: off of their last few quarters, they're adding two three
Speaker 4: four billion dollars on top of that because they're not
Speaker 4: even sure the supply and demand for the chips themselves
Speaker 4: is as I said, it's explosive at this point, and
Speaker 4: so they're basically looking at that and they're trying to guess,
Speaker 4: are we going to be fifteen percent above what the
Speaker 4: company thinks? Are we going to be in line with
Speaker 4: what the company thinks? And if you look at the
Speaker 4: last five quarters, the company itself has undershot its own
Speaker 4: sort of sales that it's reported by about thirteen percent,
Speaker 4: which is big You look at a company like Apple
Speaker 4: or Meta and Fai Book and they typically beat or
Speaker 4: miss their own guidance by about two percent. So compare
Speaker 4: that to a thirteen percent beat or miss rate, it's
Speaker 4: a pretty massive gap, especially for a company the size
Speaker 4: of Nvidio.
Speaker 2: At this point, Yeah, I mean, it sounds like a
Speaker 2: gasing game, an educated gasing game, but a bit of
Speaker 2: a gas Nonetheless, we're a couple of days out from
Speaker 2: that massive share price drop.
Speaker 1: Was that linked to the difficulty of valuing in video?
Speaker 1: It's difficult to say.
Speaker 4: I mean, I would say yes, analysts and investors and
Speaker 4: fund managers are all questioning how to value the stock
Speaker 4: and has it gotten too big? But you look back
Speaker 4: a couple of years in Video was a five hundred
Speaker 4: billion dollar stock, which, don't get me wrong, that's a
Speaker 4: very large company relatively speaking, but becoming from five hundred
Speaker 4: billion to the world's largest company at over three trillion,
Speaker 4: and people are questioning whether it's worth that the price decline.
Speaker 4: A lot of it from people that we've talked to,
Speaker 4: is because of that. People were getting worried whether it's
Speaker 4: gotten ahead of itself in terms of the run up,
Speaker 4: whether it can when the future make enough money and
Speaker 4: sell enough of these chips to back up the three
Speaker 4: trillion valuation it was at. In the last few days,
Speaker 4: investors got nervous as to whether or not they were
Speaker 4: going to be able to live up to that sort
Speaker 4: of hype. So that's sort of why we saw the
Speaker 4: pullback in recent days.
Speaker 2: So to make an ai and onogy, then how are
Speaker 2: analysts learning and projecting about how in Video's stock price
Speaker 2: will look in the future. What sort of clues the
Speaker 2: forward price to earnings ri cio give us as to
Speaker 2: what might be the future direction of the stock.
Speaker 4: Yeah, I mean they will use it to try and
Speaker 4: project out Right now it's trading around it's a forty
Speaker 4: times multiples. That's something that analysts will use to compare
Speaker 4: it to itself versus history. They'll compare it to other companies,
Speaker 4: and one of the things that we hear from a
Speaker 4: lot of people is that's expensive relative to most companies
Speaker 4: on the S and P five hundred. They will essentially
Speaker 4: look at that and say, can it trade at a
Speaker 4: higher level than this? Can it trade it at eighty
Speaker 4: times earnings? Can it trade it one hundred times earnings?
Speaker 4: And then they'll look at the price and they will
Speaker 4: sort of extrapolate that out. They will essentially put their
Speaker 4: price targets on it and say, we think that this
Speaker 4: could trade it sixty times earnings, which equals a, for example,
Speaker 4: a two hundred dollars price target, which an analyst recently
Speaker 4: came out in the last few weeks with that exact
Speaker 4: price target, which would put the company at close to
Speaker 4: five trillion in the next year, which is massive.
Speaker 2: It's not that often that we get to reference middle
Speaker 2: age middle age mathematicians maybe, but not mathematicians in the
Speaker 2: middle ages. But I'm talking about Fibonacci, a word that
Speaker 2: some of our listeners may only have heard the Devinci code.
Speaker 2: But I'm wondering how much the Fibonacci retracement level plays
Speaker 2: into this, And if you can explain it for those
Speaker 2: that don't know.
Speaker 4: Sure, Yeah, it is a very complicated math formula that
Speaker 4: I will not try to explain, but at its core,
Speaker 4: it's something that traders and analysts use to sort of
Speaker 4: analyze price moves. They look at it and they tend
Speaker 4: to say these levels correspond with what they would consider support.
Speaker 4: So if the stock is falling, they will look at
Speaker 4: one of these so called retracement levels, and they will say,
Speaker 4: you know, we think that the stock is going to
Speaker 4: reach this level, and then investors will, based off of history,
Speaker 4: based off of other technical analysts viewpoints, they will say
Speaker 4: that the stock is going to bounce off of that level.
Speaker 4: And that's actually something that we've seen within video stock itself.
Speaker 4: You see it with a lot of other stocks. Again,
Speaker 4: technical analysis is a hot topic among traders and investors.
Speaker 4: Some people believe that it's really an art form. Some
Speaker 4: people believe that it's just like magic and is not
Speaker 4: very real. It's very divisive among traders, depends on who
Speaker 4: you ask. But if you look at the charts, especially
Speaker 4: within video recently, those retracement levels have acted as support
Speaker 4: levels for the stock, which has lend some credence to
Speaker 4: the validity of using them to project where the stock
Speaker 4: is going to go from here.
Speaker 2: And once again, I realize the Italians can teach us
Speaker 2: so much. Matt Turner, thank you so much for joining us.
Speaker 2: Matt leads our coverage of US equities. For more explanations
Speaker 2: like this from our team of twenty seven hundred journalists
Speaker 2: and analysts around the world, search for Quick Take on
Speaker 2: the Bloomberg website. Or Bloomberg Business App. I'm Stephen Caroll.
Speaker 2: This is here's why. I'll be back with more next week.
Speaker 2: Thanks for listening.