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