As NVIDIA (NVDA) and other big AI stocks take a beating post the DeepSeek news, the market reminds us that we live in a competitive world. Companies rarely enjoy monopolies, not even hyped-up tech companies.
The Fallacy of the Prevailing Narrative
The problem with NVDA and the hyped-up AI and energy stocks is that they were (and still are) pricing in gains from AI as if they were going to have monopolistic market share. The stocks were priced on the hype that there would not be any real competition, and the companies would enjoy outrageously high profits on AI while the rest of the world stood and watched in awe.
Almost every day, there was a new report from Wall Street or story from the media about how much money AI was going to make the certain companies. Big tech CEOs were becoming super stars. The media and Wall Street quoted their predictions about the trillions of dollars that would be spent and made from AI daily.
The world was big tech’s AI oyster, and a lot of U.S. companies were going to get super rich from AI.
Well, we now know that is not true after DeepSeek showed how to build a better AI for a fraction of the cost.
The Bigger The Fallacy, The Harder They Fall
Whenever stocks get that expensive, investors need to beware. DeepSeek reminds us that the tech industry is all about disruption. The early leaders in a new trend are rarely the long-term winners.
So, anytime stock valuations get to the point where they are embedding monopoly-level revenue and margins, investor should slam on the brakes.
Are we surprised to see tech stocks getting crushed today? Not at all, we’ve been warning investors of the nosebleed valuations for a long time.
Get The Honest Narrative on NVDA
Back in September of 2024, we wrote a case study and warned clients that Nvidia’s stock valuation had gone too high in My Secret Weapon for Calling the Top in NVDA. As I write this report, the stock is back to the price where we called the top.
How did we call the top?
We did the honest math on the future revenue and returns on invested capital (ROIC) required to justify the stock price. Specifically, we showed that to justify ~$118/share, Nvidia needed to grow
- Revenue to $3.7 trillion, about the GDP of India, #5 in the world and
- ROIC to 975%, 6x higher than its current ROIC and higher than any other company in the S&P 500.
I used our best-in-class discounted cash flow (DCF) modeling tools to do this research, and I explained exactly how our client can perform the same analysis.
More Honest Narratives With the Right Tools
With our DCF model, it’s easy and only takes a few seconds to develop an honest narrative on the future revenues, margins, and cash flows implied by stock prices.
If you’re interested in seeing more examples of how our DCF model delivers non-hype, math-based narratives, I recommend checking out the Reverse DCF Case Studies here in our Online Community. It’s free to join our Online Community, just complete this form.
How To Avoid the Landmines
Whenever stocks get that expensive, it is only a matter of time before they fall back to earth as the law of competition inevitably proves the expectations for future cash flows to be overly optimistic.
We have multiple Model Portfolios, including our Zombie Stocks list, to warn investors of stocks to avoid and alert them to stocks that get our Attractive rating. We also provide best-in-class ratings for stocks, ETFs, and mutual funds.
If you’re interested in learning more about how to get to the truth about stock valuation, watch our latest training: Unveiling a Trust-Based Rating System for Smarter Investing.
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This article was originally published on January 28, 2025.
Disclosure: David Trainer, Kyle Guske II, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.
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