Optimists have had every reason to smile over the last two-plus years. Since the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite bottomed out in October 2022, the bulls have been in firm control on Wall Street. Recently, all three indexes worked their way to record-closing highs.
Though catalysts have been abundant and include Donald Trump's return to the White House, stock-split euphoria, and better-than-expected corporate earnings, the primary wind in Wall Street's sails has been the rise of artificial intelligence (AI).
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The ceiling associated with AI is astronomically high. Giving software and systems the ability to reason, act, and evolve over time, all without the need for human intervention, is a potential long-term game-changer for most industries around the globe. It's why the analysts at PwC believe artificial intelligence will add $15.7 trillion to the global economy by 2030.
While there have been dozens of direct and ancillary beneficiaries of the AI revolution, no company is the face of this movement more than Nvidia (NVDA +2.59%).
Nvidia rightly claims its spot as the AI kingpin
When the curtain closed on 2022, Nvidia was a $360 billion tech stock known best for its graphics processing units (GPUs) used in PC gaming and cryptocurrency mining. Less than two years later, it had gained more than $3 trillion in market value and (briefly) became Wall Street's largest publicly traded company.
Nvidia's ascension has everything to do with its Hopper (H100) GPU and next-generation Blackwell GPU architecture, which are enabling the training of large language models (LLMs) and powering generative AI solutions. Orders for the company's hardware are backlogged, with CEO Jensen Huang referring to demand for Blackwell as "insane" back in October.
NASDAQ: NVDA
Key Data Points
Having a superior product, in terms of computing speed, and having demand for that product overwhelm supply, is an envious position to be in. AI-GPU scarcity has allowed Nvidia to charge a 100% to 300% premium to competing AI chips, which in turn has pushed its gross margin into the stratosphere.
Nvidia is having success beyond its AI hardware, as well. The company's CUDA software platform, which is used by developers to build LLMs and maximize the computing potential of their GPUs, is helping to keep clients loyal to its ecosystem of products and services.
With enterprise AI spending still in its infancy and no other chipmakers particularly close to matching the computing potential of the Hopper or next-gen Blackwell GPU, Nvidia would appear to be ideally positioned for the future.
But if investors pay close attention to what Nvidia's insiders are up to, they might change their tune.
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Nvidia's insiders are speaking volumes -- but is anyone listening?
One of the best aspects of putting your money to work on Wall Street is that it's more transparent than it's ever been. With a click of a button, investors have instant access to operating results, balance sheets, management commentary, and investor presentations.
Additionally, investors can track the purchasing and selling activity of Wall Street insiders, which represent the high-ranking executives and board members of publicly traded companies. Insiders are required to file Form 4 with the Securities and Exchange Commission within two businesses days following a transaction date.
On Dec. 3, 2024, Nvidia hit a dubious milestone. This marked exactly four years since the last insider purchased shares of the company on the open market. In this case, it was Chief Financial Officer Colette Kress's two children who were the beneficiaries of respective 100-share purchases, per the Form 4 filing. In the four years and two months that have followed, 161 Form 4s have been filed, all of which were insider sales totaling an aggregate of $3.4 billion.
To be fair, not all insider selling activity is necessarily nefarious. A lot of high-ranking executives receive the lion's share of their compensation in the form of vested shares and stock options. Insiders need to execute their options contracts before they expire and might choose to sell shares of their company to cover their federal and/or state tax liability.
Then again, 161 dispositions to 0 acquisitions over a span of 50 months is a pretty telling story. If the company's own management team and board of directors don't view their stock as a bargain, why should investors?
NVDA PS Ratio data by YCharts. PS = price to sales.
Companies on the leading edge of a next-big-thing innovation being in a bubble is nothing new. Dating back to the advent of the internet in the mid-1990s, every game-changing technological innovation has navigated its way through an early stage bubble. With most businesses lacking a clear game plan with their AI investments, there's a good chance we're witnessing history rhyme, once more.
Nvidia's valuation is also consistent with previous bubbles. Prior to the bursting of the dot-com bubble a quarter of a century ago, Amazon and Cisco Systems peaked at roughly 40 times their trailing-12-month (TTM) sales. Perhaps uncoincidentally, Nvidia topped out around 42 times TTM sales last summer.
Even with Nvidia possessing well-defined competitive advantages in AI-accelerated data centers, the persistent selling by insiders and complete lack of buying points to Nvidia stock being richly valued.
