NVIDIA - The moment of truth is approaching, America versus Europe - the winner is...

Chart of the week

The chart shows the market capitalization of the three major technology stocks Apple, Microsoft and Alphabet (Google) compared to the total market capitalization of the markets in the eurozone (SX5E), the UK (UKX) and Switzerland (SMI).
Why this is important
We are often asked why we invest 60-70% in the Americas. The chart above gives a sense of the huge differences in market size. Three of the best known stocks in the US have a larger market capitalization than the entire market in Europe!

The global equity index MSCI World, which is weighted according to market capitalization, has a weighting of around 70% for the USA.
But an overweighting of the USA is also worthwhile in terms of returns. Almost all technological development in the internet and IT technology is dominated by US companies.

The chart compares the valuation of equities in America (S&P 500, EPS) with the valuation in Europe (dark blue the weighting of the index and light blue in an equally weighted variant). In the past 35 years, Europe has never been as undervalued against America as it is today, by around 35%.

The chart shows the impressive outperformance of the USA (S&P 500, purple) compared to Europe (EUROSTOXX, blue) over the past 15 years. Anyone who did not have the USA in their investment portfolio has earned very little.

Is now the time for a turnaround? Will Europe now become the outperformer of the next 20 years? We have our doubts. The war in Ukraine is still causing great uncertainty and the entire current trend in artificial intelligence is being driven almost entirely by the USA.

In classical economics, goodwill is calculated as a discounting of all future profits. This is why we never tire of mentioning how important the development of company profits is.

The chart shows the "earnings revisions". In other words, the change in analysts' expectations for company profits. In the USA, these have risen continuously over the past two years (blue line), whereas in Europe (green line) and China (orange line) they have been steadily lowered.
A trigger is needed for a trend reversal to occur. However, we do not currently see such a trigger. We are therefore maintaining our high weighting in the USA.

NVIDIA determines the direction of the market

There are two ways of calculating market breath. You can compare the number of stocks above their 200-day price average with the number of stocks below it or, as here, you can compare the usual capital-weighted S&P 500 with a variant in which all 500 stocks are equally weighted.

The result is the same with both calculations. We have the lowest market breadth since 2009. Normally, a declining market breadth is a sign that the trend is turning.
Last year and this year, the American stock market was dominated by seven stocks, almost all of which generated returns and currently account for 25% of the market weighting of the S&P 500. And of these seven stocks, one stands out in particular: NVIDIA.

NVIDIA shares rose 300% last year and have already risen 56% this year.
In 1848, there was a huge gold rush in California. Thousands moved to California to seek their fortune. Only a few found it and became rich with gold. But those who got rich were all shovelers and tent makers.

In 1900, there was an oil boom in Texas. Again, thousands set off and again only a few found fortune. Those who got rich were the barrel manufacturers and transportation companies, because the oil was not consumed where it was extracted.

NVIDIA is the shovel and barrel manufacturer in the artificial intelligence trend. No provider of services in this sector can avoid NVIDIA's products. They are best optimized for this purpose.

NVIDIA was long known as a manufacturer of graphics cards for computer games. However, it soon became apparent that this is exactly the kind of computing that is also used for mining Bitcoin. This was the first major trend from which NVIDIA benefited. And then it turned out that these are exactly the calculations that are relevant for artificial intelligence calculations.

Part of it was certainly luck, but NVIDIA understood these trends and consistently aligned their products with them when no one else believed in Bitcoin and AI. Now they are reaping the rewards.

NVIDIA is the barometer for the artificial intelligence trend. On Wednesday after the close of trading, they will publish their quarterly figures for the fourth quarter of 2023 and, almost more importantly, their outlook for 2024. If NVIDIA fails to meet expectations, it could drag down the entire AI industry and trigger a turnaround in the market as a whole.

Expectations are brutally high. EPS of 4.18 is expected. In the four quarters to date, NVIDIA has exceeded estimates by 25% to 45% in each case. This is also expected in the current unofficial estimates, the whisper estimates.

The overall market is currently valued at a PE of 23.3. Sales are expected to increase by 418%.

NVIDIA with a PE of 95.8, i.e. ninety times the annual profit. If someone were to buy the entire company today, it would have to make at least the profit of today for 95 years in order to amortize the purchase price. By way of comparison. 95 years ago, there were no computers, Internet or cell phones.
When is too high, too high?

It's not as if we haven't seen something like this before. The chart shows Cisco's share price (black) from 1996 to 2002 and NVIDIA's share price (red) from 2020 to today.

Cisco was the shovel and barrel manufacturer for the Internet. The whole world had to be wired and Cisco was the only one with the products to do it. As it happened, the dotcom bubble burst in 2000. Cisco still exists today and is a very profitable company. However, an investor who bought at a high of 78 in 2000 had to wait 16 years to make a profit again.

The companies in the energy sector in the S&P 500 supply the entire country with energy. They form the basis for all economic development. This includes companies such as ExxonMobil, Occidental Petroleum and Chevron. The market capitalization of NVIDIA (blue) is now higher than that of the entire energy sector (black) in the USA. This is a further indication that NVIDIA's valuation is exaggerated.
The optimists counter all this with the following stock market wisdom: "The trend is your friend". Trends usually last longer than you think. Apple is a typical example.
NVIDIA's press conference on Wednesday evening promises to be extremely exciting. Cautious investors had better buckle up.

If NVIDIA actually manages to surprise everyone again, the artificial intelligence trend could continue for another 3 to 6 months.