For those diligent skeptics and vigilant bubble watchers, the latest developments regarding Nvidia might feel like adding salt to the wound. The signs were clear, almost unmistakable, that Nvidia was poised to outperform expectations. The only question was how wide a margin was and whether this performance would propel the stock upward.
Despite the genuine surprise expressed by some market participants regarding the speed and extent of the rally, it’s essential to remember one golden rule: don’t short bubbles.
I’ve emphasized this point previously and made it explicitly clear to my investors: we will never short a bubble. Not only is it complicated to time the market peaks accurately, but the odds are stacked against you. You’re likely to be wrong nine times out of ten, resulting in substantial losses before potentially hitting the jackpot.
Betting against the Nvidia “bubble,” figuratively or literally, presents another challenge. As earnings accelerated, the perception of a bubble surrounding Nvidia shifted. Before the company’s Q1 report last year, which became widely influential, the stock traded at approximately 65 times earnings. However, by the beginning of 2024, it was trading at around 25 times earnings. Of course, many will look at the first week of January and imagine what could have been.
Even after the year-to-date surge leading into the fourth-quarter results, Nvidia was still trading at “just” around 33 times earnings. While not inexpensive, it doesn’t fit the criteria of a proper bubble.
If the entire market trades at 33 times earnings, that might signal a bubble. However, it’s essential to clarify that a stock with remarkable growth, such as Nvidia, increasing sales by 265% and profits by nearly 500%, isn’t indicative of a bubble at 33 times earnings. It simply isn’t.
