If you are bullish for Nvidia, be sure to read this......

 

Can you guess which stock this follow chart for? I'm sure not many will be able to get it right.

For those who have followed my blog, this used to be my darling stock that I have pounded the table advising to buy numerous times before: yes, it is MSFT! I even predicted that Microsoft would become the next Apple back in 2014. Those who believed me then must have made a killing fortunate! But MSFT was dead money for over a decade for the first part of the century, while it was making a lot of money with growing business during the period. That was the reason why I was so much fun of buying MSFT then. 

Unfortunately we are going to witness another Street darling stock to follow the old footsteps of MSFT to probably become dead money for a long time. That's the hottest stock for now, the AI star: Nvidia!

Below is an analysis I saw to reason why NVDA will likely become a falling angle!

 

 

 

 From 1999 to 2012, Microsoft grew revenue at a compound annual growth rate of 11% a year. That's a terrific period of sales growth...

Microsoft's earnings per share ("EPS") soared during this time, too. EPS is a measure of how much profit a company makes relative to its share price. It's a quick measure of a business's profitability.

In 1999, Microsoft's EPS was just $0.35. That means for every share of MSFT, Microsoft brought in 35 cents in profit. But by 2012, it had an EPS of $3. So Microsoft became about 8.5 times more profitable in 13 years.

Microsoft's share price fell 32% over that 13-year period. Even including dividends, Microsoft investors were down 12%.

The problem was Microsoft's valuation. Even though it was increasingly profitable, its share price was so expensive that it didn't matter.

We can see just how expensive Microsoft was using the price-to-sales (P/S) ratio. This figure tells us how much revenue a company makes compared with its total market cap.

MSFT's stock price was about 27 times sales back in late 1999. That means investors had to buy $27 worth of shares to get a dollar's worth of Microsoft's sales.

A valuation like this means the market had ultra-high expectations for Microsoft's growth. But these expectations were too high for any surprises to the upside.

So despite its great performance, Microsoft couldn't catch the attention of bidders. It was already "priced in"...

This is the danger of buying stocks with high valuations. And if we fast-forward to today, it's a danger that we're seeing with Nvidia...

The company's P/S ratio is currently 37. That's even higher than Microsoft when the software giant started its slump.

In other words... Nvidia's banner year will likely lead to a strong period of growth for the company. But it's unlikely that it will translate to returns for investors.

Like Microsoft, a lot of Nvidia's future growth has already been priced in by investors today. That leaves little room for the company to exceed expectations... and a lot of room for disappointment.