Proprietary Data Insights
Top Stock Searches This Month
Should You Actually Sell Nvidia?
Earlier this week in The Juice, we argued that the companies at the forefront of AI – Nvidia (NVDA) and the big names in bed with it – will lead the stock market going forward:
Stay away from companies chasing the AI trend. Doing AI for the sake of doing AI because it has suddenly burst into pop culture and the public’s consciousness. The key is to buy companies at the forefront of employing AI. Companies who just so happen to be Nvidia customers, but who are AI-focused, not merely AI-adjacent, how do we become part of this flavors of the day.
So Meta Platforms (META), up roughly 139% YTD. Microsoft (MSFT), up about 37% in 2023. And Alphabet (GOOG)(GOOGL), up approximately 51% so far this year.
And we stand by this, specifically if you’re a long-term investor. If these types of stocks stumble tomorrow or in a few years, consider it a buying opportunity if you measure your time horizon in decades or thereabouts.
That said, even as long-term investors, we’re not all the same.
So we like to present compelling information that provides a different point of view when we come across it.
Today, that info comes from WisdomTree, a firm that manages ETFs.
In a recent blog post, WisdomTree urges caution around Nvidia:
Nvidia became the highest price-to-sales (P/S) ratio stock in the S&P 500 at the end of March 2023 and up until mid-August 2023, returned a total of 52.6% compared to the S&P 500’s 8.7%.
Our past research showed that the highest-multiple stocks often see momentum that allows them to outperform the following year before they often start to underperform.
Price-to-sales ratio shows how much you have to pay to buy a share of a company’s stock relative to its revenues. The lower the price-to-sales ratio the better. Often used to get your head around the prospects of a company that doesn’t turn a profit, a price-to-sales ratio of 1 tells you that investors pay $1 for every $1 of revenue a company generates.
To get a sense of this metric, consider recent price-to-sales ratios of the companies we have mentioned so far in today’s Juice:
While not all high price-to-sales ratio stocks end up underperforming, quite a few do, according to the WisdomTree analysis:
[…] stocks with the top price-to-sales (P/S) ratio return, on average, -2% annually over the next five years, while the broader market showcases an average return of 10% during the same period.
[…] it’s clear that just growing sales faster than the market is not enough. Even the losing companies grew their sales more than six times faster than the market and still had huge negative returns. Median sales growth for the winning companies is almost 50% annually!
The sales growth that a company must sustain to continue to stay competitive and justify its high multiples doesn’t become easier with longer horizons either.
For every surviving company that also beat the S&P 500 over the next five years, there were 2.4 that underperformed.
Not just interesting, but wow. And it gets even more daunting when you consider Nvidia’s prospects within this quantitative context.
At least from WisdomTree’s perspective:
Allowing a forward-looking P/S ratio for Nvidia puts it into the >25 P/S bucket, where winners have, on average, grown their sales by more than 50% a year. For the 12 months prior to April 30, 2023, Nvidia had total sales of around $26 billion. Growing that at 50% a year means that in 2028, its annual sales would reach more than $197 billion a year—a staggering sales number that only about 30 companies worldwide surpass currently.
This number becomes even more daunting when we consider the fact that estimates put the total size of the AI GPU market at between $120 billion and $150 billion by 2028.2
This makes it very unlikely that Nvidia can grow its sales by 50% a year, even if it has 100% of the market, if demand doesn’t grow at that rate.
One of the most promising things, then, that investors can look for is proof that Nvidia can hold on to its share of the market, estimated to be between 80% and 90% right now.
WisdomTree went on to compare 2023 Nvidia to late ’90s and early 2000s Cisco Systems (CSCO).
Cisco was once the king of routers and switches as the internet revolution took hold. Much the same way Nvidia is powering the emergence of artificial intelligence.
Then competition increased for Cisco, as it certainly will for Nvidia from, for example, Advanced Micro Devices (AMD) and Intel (INTC). Some of Cisco’s competitors ended up outpacing them. It remains to be seen if Nvidia will suffer the same fate.
It’s easy to do rearview mirror analysis, but also critical to give yourself a complete picture as you ask yourself questions such as should I take profits and will this stock be a core holding for the foreseeable future in my long-term portfolio?
This way of looking at NVDA got us thinking about three of our favorite, long-term picks that have done well in 2023. Here they are, with a link to a recent Juice where we talk about them, alongside their current price-to-sales ratio:
Not too shabby.
Also not too shabby … the YTD returns of UBER, DASH and ABNB, which are 78.8%, 69.5% and 55.8%, respectively.
The Bottom Line: All of this to say, nobody – not you, not an ETF company, not even The Juice – has a crystal ball. However, we do have the ability to take a comprehensive approach to investing.
Keep it diversified.
In one corner, you have the companies at the forefront of AI, who just so happen to have been pretty damn good tech investments long before everyone and their mother started talking about AI.
In another corner, you have the names we call story stocks with intriguing long-term narratives. We explain our rationale around these companies in the three links next to market-crushing UBER, DASH and ABNB.
And in another relatively safe corner, you have blue chip dividend paying stocks, still growing, and throwing off impressive amounts of income.
News & Insights
Want to get content like this directly to your inbox? Then we urge you to sign up for our newsletter here