“The sun has got his hat on hip-hip-hip hooray” Ambrose

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The correction in the Nvidia share price that started last week continued into the start of this week, in the process, wiped out more of its market cap than any other company in history in this short time frame. It’s almost as if making Nvidia the most valuable company in the world triggered something of a reality check. So, the question is, is it a correction or the portent of something more concerning for the technology sector? If we look at valuation, 23x sales for Nvidia is quite scary; anything over 10x is considered toppy. On a price to earnings, that’s a little more debatable on 44x, not completely excessive for a company growing at such an apparent rate. The tech sector is currently trading around 25x its price to earnings; at the peak of the tech boom in 2000, it was closer to approximately 60x, so we have a long way to go to get there.

Cisco systems were the kind of Nvidia of the previous tech boom as the demand for communications and network equipment was seen as insatiable, as it would seem is the case currently for Nvidia chips. Of course, demand never quite met expectations in the time frame expected; other companies came into the market, and Cisco’s fall from grace was swift, almost as swift as its rise. The share price 25 years later has recovered a lot but has still to reach the peak of 2000. I am not suggesting that everyone rush for the Nvidia door for one moment. I have no opinion one way or the other, but Cisco does provide a lesson in what can happen when expectations and valuations get ahead of themselves.

While it remains to be seen if we are in a bubble and if expectations have outpaced reality, it is reasonable to assume that just as the internet gave rise to industry giants like Apple, Alphabet, Microsoft, and Amazon, AI is poised to do the same, ushering in a new era of economic growth. There were also those companies that never met their lofty expectations and were never heard of again. That will be the case again with AI.

As you know, I don’t comment on Bitcoin, as it seemed to have been spawned from a video game and has more in common with that than other investable assets. It does seem to provide something of a risk sentiment indicator at times. Bitcoin has had a rough time recently, giving back roughly 15% of the gains this year. A similar selloff was in late March and early April; at the same time, the S&P 500 gave back around 8%. Coupled with the recent downtrend in the US economic surprise index, a summer correction may be on the cards.