In April 2007, Microsoft CEO Steve Ballmer famously argued that ‘there’s no chance that the iPhone is going to get any significant market share. No chance.’ Of course, he wasn’t the first tech leader to make a spectacularly wrong prediction, and he certainly won’t be the last.

But considering the recent trajectory of Nvidia (NASDAQ: NVDA) shares, it may well be that the NASDAQ tech company is now operating within a bubble.

It’s up 172% year-to-date, more than tripled since a low of $112 in early October 2022, and has risen by 500% in five years. It’s also worth noting that it participated in the tech stock crash between November 2021 and October 2022, falling from $330 to $112 in the space of a year.

A similar fall isn’t impossible in the near future.

Nvidia Q1 results

If you take a macro look at S&P 500 returns in 2023, Société Générale SA strategist Manish Kabra recently noted that ‘the AI boom and hype is strong...so strong that without the AI-popular stocks, S&P 500 would be down 2% this year.’ Indeed, the index is up 10% year-to-date, but entirety of this return is comprised of just seven tech-focused companies.

Last week, Nvidia’s Q1 results saw it add $200 billion to its market cap in a single day of trading. For context, the proposed US debt ceiling deal involves just $50 billion in spending cuts. The company has broken through the $1 trillion market capitalisation barrier, and trades on a sky-high price-to-earnings ratio of 213.

It’s worth putting this valuation in context. Full-year fiscal 2023 saw NVDA generate $26.97 billion, essentially flat on fiscal 2022. GAAP earnings per diluted share were $1.74, down 55% from a year ago.

And in this most recent quarter, the AI stock delivered $7.2 billion in revenue, much higher than its previous guidance for $6.5 billion. But revenue was still 13% lower than in the same quarter last year. However, adjusted earnings rose by 28% to $0.82 per share.

Much of the improved performance came from the data centre business, which saw revenue surge by 14% year-over-year to a record $4.28 billion. CFO Colette Kress enthuses that ‘Multiple CSPs announced the availability of H100 on their platforms, including private previews at Microsoft Azure, Google Cloud, and Oracle Cloud Infrastructure, upcoming offerings at AWS.’

Further, CEO Jensen Huang noted that ‘our entire data centre family of products — H100, Grace CPU, Grace Hopper Superchip, NV Link, Quantum 400 InfiniBand and BlueField-3 DPU — is in production. We are significantly increasing our supply to meet surging demand for them.’

Where next for Nvidia shares?

Nvidia is issuing forward guidance of $11 billion in this current quarter, a huge increase on recent analyst estimates of circa $7.2 billion and the $6.7 billion revenue of Q2 FY23. Encouragingly, it’s also anticipating a non-GAAP gross margin of 70%, a huge improvement on the 46% margin achieved in the same quarter last year.

Nvidia’s market position as the ‘picks and shovels’ AI share can look attractive. Polaris analysis estimates that generative AI could see annual growth of 34% over the next ten years and rise to $200 billion in annual revenue by 2032. McKinsey thinks that AI could add $13 trillion to the global economy by 2030, while Ark Investment thinks this could be as high as $200 trillion.

FactSet research shows that management teams on 110 different S&P 500 companies discussed AI in their latest earnings calls. Many of these companies are non-tech sector, suggesting there could be about to be a huge shift in computing.

Nvidia has also just announced a slew of new technologies; the Spectrum-X designed to ‘improve the performance of Ethernet-based AI clouds,’ a content engine designed to make high quality commercials at low cost, and the NVIDIA DGX supercomputer for advanced generative AI language applications.

While ChatGPT and the associated buzz does appear to be a real breakthrough, I am developing a creeping sense of Déjà vu. Tech stocks love their buzzwords; in 2022, it seemed as if start-ups simply needed to mention blockchain, crypto, the Metaverse, disruptive tech, Web3, or DeFi, and investors would open up their wallets.

This didn’t always end well.

It was only a few short weeks ago that Silicon Valley Bank and Credit Suisse collapsed. Inflation is still uncomfortably high, and interest rates are still rising. Tech stock growth is usually restricted when monetary policy tightens, and Crunchbase data shows that 146,192 tech employees have been laid off so far this year. Many analysts are still expecting that the US will shortly enter into recession.

Nvidia may be a game-changing opportunity. But it might also be in the eye of the storm.