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Hello, Reader.
With wings made of feathers and wax, young Icarus flew closer… and closer… and closer to the sun. As this figure from ancient Greek mythology neared the bright star, his man-made wings eventually melted, and the boy plunged back toward Earth.
The story of Icarus is a classic warning: When you’re soaring on success, excitement can create tunnel vision… eventually leading you to be scorched by the sun’s flames.
The lesson is particularly relevant right now in the stock market, where overvalued tech stocks – and their investors – could take a page from Greek mythology.
Namely, Nvidia Corp. (NVDA).
The AI chip giant announced spectacular first-quarter earnings Wednesday after the close. Unsurprisingly, NVDA shares punched through $1,000 and reached new Icarian heights.
So, in today’s Smart Money, let’s uncover what Nvidia’s recent earnings could mean for the future of the company… and I’ll share my warning for the tech sector as a whole.
Mighty Fragility
For the quarter, Nvidia reported earnings of $6.12 per share, compared to $0.82 in the year-ago period. And sales soared. Nvidia reported revenue of $26.04 billion, surging 262% from the same quarter last year. Nvidia’s data-center category rose 427% year-over-year to $22.6 billion in revenue.
Nvidia shares immediately jumped 5.9% to $1,005 in after-hours trading, passing $1,000 for the first time. They’ve continued to climb higher today.
Benjamin Franklin famously said, “Nothing is certain except death and taxes.” Well, in a quip last night, Ryan Detrick, chief market strategist at Carson Group, added a certainty to that list: “NVDA beats on earnings.”
It seems that he’s right. In the past four quarters, the chipmaker’s stock has seen positive earnings surprises of 18.1%, 29.2%, 19.3%, and 11.4%, respectively.
However… and you knew a “however” was coming… Nvidia is trading for 87 times earnings. At that lofty valuation, the stock might struggle to continue its market-trouncing performance.
I’ve been wary of a somewhat severe drop for Nvidia’s share price for some time now. As I’ve stated in a previous Smart Money…
Stocks like Nvidia make their own rules, at least for a while. But during Champagne-popping moments like these, we investors might want to keep in mind that markets are cyclical. High valuations yield to low valuations… eventually.
In other words, Nvidia is like a triumphant Roman general of ancient times who would ride a chariot along a lavish victory parade upon returning from battle. According to anecdotal accounts, the general would ride in the chariot with a special companion – a slave who would hold a golden crown over his head, while whispering in his ear, “Memento mori,” which roughly translates to, “Remember you are mortal.”
World-changing stocks like Nvidia eventually become overheated and enter severe boom-bust cycles of their own, especially with these overblown valuations.
In fact, Nvidia’s valuation path looks eerily similar to that of Cisco Systems Inc. (CSCO) in the 1990s, as you can see from the chart below.
With nearly double the earnings power of what Nvidia boasts today, Cisco still crashed over 87% from its top.
In other words, Nvidia might be flying too close to the sun for its own good.
If Nvidia’s wings melt away, other major tech players – and thousands of other stocks – could also drop…
Tech’s Ripple Effect
As the leading artificial intelligence chip designer, think of Nvidia as the gardener providing nourishment to the blossoming plants that are Alphabet Inc. (GOOGL), Meta Platforms Inc. (META), Amazon.com Inc. (AMZN), and Microsoft Corp. (MSFT).
Thus, Nvidia’s potential fall to Earth could have far-reaching consequences not only for the tech industry, but also for other sectors that benefit from AI advancements.
Soon, these tech stocks could experience a repeat of the dot-com crash of 2000, especially as they keep flying closer to the sun.
This is why the world’s wealthiest investors are rushing for the exits and unloading shares of their own companies in what’s being called “The Great Cash-Out.”
History, and mythology, is quickly repeating with terrifying accuracy. So, if you have any money in the markets – especially in tech stocks – it’s time to prepare.
Click here to get the details.
Regards,
Eric Fry
