Foreign. At the time of recording this video, the Semiconductor Company Nvidia has a marquee cap of 750 billion dollars, making it the sixth most valuable company in the world worth more than Berkshire Hathaway meta and Tesla But by revenue and net income, it's not even the top 100. Nvidia's market cap is equal to 29 times last year's sales and a whopping 173 times last year's net income. What makes the valuation of Nvidia even more surprising is that we are currently experiencing a historic chip glut.

According to: Gartner recent declines in PC sales are the worst in 20 years. Nvidia is by no means immune to this. Since its recent Peak last year, the chipmaker's revenue has fallen by almost 30 percent and its net income has been more than cut in half as prices of their Gpus have fallen. Many technology stocks have experienced the so-called Pandemic round trip during 2020 and 2021, They skyrocketed as work from home caused a massive increase in demand for their products and services.

but as the economy returned to normal, they gave back some if not all of those gains and video experience some something similar with its share price. Falling by 65 percent as profits declined in 2022, but over the past few months its share price has more than doubled, almost reach achieving its pandemic highs. This is despite the fact that its revenue and profits are still far lower. The Monster Rally we've seen over the past few months is almost entirely attributable to the hype around Chat Gbt and generative.

AI Generative AI Models require huge amounts of computing power to train and operate. Nvidia's graphics cards are necessary to supply this computing power in these early stages. Nobody knows which company will be the leader in generative. AI It could be Microsoft Google or some new company that doesn't exist yet, but it doesn't matter who is successful.

either way, they'll have to buy Nvidia graphics cards to run their AI models. This all sounds great. Nvidia is the picks and shovels play to benefit from the coming AI Gold Rush This might all sound familiar because we've seen this movie before. The Internet Infrastructure Company Cisco was the Nvidia of its day.

It created routers and other Hardware necessary for connecting Enterprises to the internet during the.com bubble of the late 90s and early 2000s. Cisco saw its Revenue explode as every company wanted to get connected to the internet. All this hype caused a massive bubble in Cisco's share price and the company achieved a peak valuation of more than half a trillion dollars. While the new internet age was real, Cisco's valuation was completely unjustified.

When the bubble popped, its share price fell by 90. More than 20 years later, it is still far below its all-time highs. Currently, Nvidia is benefiting from a similar amount of hype, so in today's video, we'll take a deep dive into Nvidia and see whether its share price will suffer the same fate as Cisco or if this time it's different. Foreign graphics cards also known as Gpus for both consumers and Enterprises on the consumer side, they sell for around 200 at the cheapest all the way up to more than two thousand dollars for their newest and most powerful systems.

The biggest use case for graphics cards is: PC Gaming: If you want to play AAA games like Call of Duty or Halo on high resolution, you need a graphics card to render the complex Graphics in real time. Nvidia Graphics cards are also used by content creators such as: YouTubers for video editing On The Wall Street Millennial team. We use Nvidia Gpus to create videos including the one you're watching right now. Nvidia also creates larger, more powerful Gpus for cloud computing applications.

For example, their Dgx A100 system has a suggested retail price of two hundred thousand dollars. These chips are purchased by the likes of Microsoft Google and Amazon who use them to power their massive data centers. Nvidia's Gpus have the best performance on the market, which has allowed them to secure dominant market share. As of 2022, Nvidia had 88 market share, making them a near Monopoly.

The pandemic was a huge boost for NVIDIA. The company has two main Revenue segments: video gaming and data Center. Both of them grew massively in 2020 and 2021. With people stuck at home, they turn to video games as their main source of entertainment.

Also, with so many people working from home, there was a surge in the usage of virtual desktops and other work from home software. This all required a large amount of computing power. Cloud computing companies like Microsoft and Amazon bought Nvidia Gpus to expand their data centers. Additionally, the Federal Reserve's Quantitative Easing policy has created a massive bubble in the price of Bitcoin and other cryptocurrencies.

As it turns out, Nvidia Gpus are useful not only for video games and data centers, but also for mining Ethereum. With the price of Ethereum, skyrocketing, miners were buying graphics cards hand over fists in an attempt to mine as many coins as possible. By 2021, demand for Gpus skyrocketed as Gamers cryptominers and data centers were all trying to get their hands on as many as possible. According to PC Mag, a graphics card that cost 569 dollars in 2020 saw its retail price increased to 749 dollars one year later.

But even this 30 increase wasn't enough to establish balance between supply and demand. Most retailers were out of stock. Third-party sellers on Amazon and eBay were selling their used graphics cards for up to 1275 dollars almost double the retail price. By 2021, Nvidia's Revenue had more than doubled compared to 2019, and their net income nearly tripled to 10 billion dollars.

This impressive growth made it one of the most popular stocks among both individual and institutional investors alike. Foreign was hit by a myriad of exogenous events, which proved disastrous. As the economy reopened, people went back outside and back to the office. This drastically decreased demand for video gaming and data center.

Hardware Secondly, 40-year High inflation forced people to divert a greater share of their income to Necessities like food and fuel, leaving less disposable income for expensive graphics cards. And finally, in September of 2022, Ethereum transitioned to a proof-of-state model which does not require nearly as much computing power. This decreased demand for NVIDIA Gpus for crypto mining purposes to almost zero. Nvidia's video gaming relay Revenue was almost cut in half in the second half of 2022.

The data center segment held up a little bit better, but its growth also flatlined and then decreased slightly. On the bright side, because Nvidia's graphics cards are so expensive, their profit margins are very high, so even with significant Revenue declines, they were still profitable and they were never at any risk of going bankrupt. Nevertheless, Nvidia Stock price declined by 65. This kind of share price volatility is normal for Semiconductor stocks, as the industry is notoriously cyclical.

Normally, during a chip glut, you have to wait a few years for demand to finally catch up to supply before semiconductor stocks recover. But in the case of Nvidia, the share price started increasing again just as quickly as it declined. The recovery of Nvidia's share price coincided almost exactly with the release of Chatgpt. While Gpus were originally designed for video game rendering, their ability to perform many computations simultaneously makes them very effective for training and operating AI models.

Gpus are needed not only for the initial training of the AI model, but every time someone uses Chat Gbt computing power is needed to give them a response. so the number of Gpus required will scale with the number of users. According to the consulting firm, Trend Force Open AI probably needed the equivalent of 20 000 Dgx a100 Nvidia Gpus to train the chat Gbt model. Those Gpus cost two hundred thousand dollars each, so that costs a total of four billion dollars.

They further estimate that Open AI needs the equivalent of about 30 000 of these systems to support the product's 100 million active users. This costs around 6 billion dollars. Open AI Did not buy 30 000 Nvidia Gpus. They partnered with Microsoft to Leverage The Tech Giant's existing cloud computing infrastructure which already had the Gpus.

As the AI industry grows Microsoft Google Amazon IBM and many other company is, we'll have to buy more Gpus. This benefit will accrue to Nvidia and Video will be one of the biggest beneficiaries of generated AI There's no doubt about it, but is this enough to justify the company's 750 billion dollar market cap and almost 30 times price to sales ratio? Hundreds or even thousands of investment bankers all around the world are doing complex calculations trying to figure this out. They're trying to estimate how many use cases there are for generative AI how many people will use it, how many prompts it will make per day Etc They take all of this to predict how much demand for NVIDIA Gpus there will be over the next decade. Currently, the consensus is that the demand will be massive and this justifies Nvidia being the sixth most valuable company in the world in the 1990s.

The exact same thing happened with Cisco Investment bankers did their calculations about how big the Internet would become and how this would translate to a massive increase in demand for Cisco's routers and other internet infrastructure. so they kept increasing their price targets for Cisco's stock directionally. They were correct. The Internet was revolutionary and the growth of the industry did benefit Cisco but they massively overestimated the magnitude of this benefit causing Cisco's stock to become a bubble.

It ultimately lost 90 percent of its value when the bubble popped. It's extremely difficult to predict how a nascent industry will develop over a multi-year Time Horizon It would thus be hubris for anyone to think that they can do this with any degree of accuracy. Generative AI is perhaps the most exciting technological development of this generation. Just like the internet was the most exciting development 20 years ago, it's easy to get carried away thinking of the potential as Limitless.

That's why we see the likes of Jim Cramer putting a 10 trillion dollar price Target on Nvidia That's not to say the company won't be a good investment in the long run, but when there's so much hype around the stock, it pays to take a step back. Fortune Does not always favor the Bold Alright guys, that wraps it up for this video. what do you think about? Nvidia Let us know in the comments section below. As always, thank you so much for watching and we'll see in the next one.

Wall Street Millennial Signing out.