St. James Investment Company, an independent, fee-only, SEC-registered investment advisory firm, released its second quarter 2023 investor letter. A copy of the same can be downloaded here. The letter discussed the investment manager’s views on market crashes and according to him, each generation fails to learn from past lessons and financial markets are not immune to fads and trends. The firm invests in high-quality businesses focusing on long-term returns. In addition, please check the fund’s top five holdings to know its best picks in 2023.
St. James Investment Company highlighted stocks like NVIDIA Corporation (NASDAQ:NVDA) in the second quarter 2023 investor letter. Headquartered in Santa Clara, California, NVIDIA Corporation (NASDAQ:NVDA) provides computer graphics processors, chipsets, and related multimedia software. On July 7, 2023, NVIDIA Corporation (NASDAQ:NVDA) stock closed at $425.03 per share. One-month return of NVIDIA Corporation (NASDAQ:NVDA) was 9.63%, and its shares gained 168.36% of their value over the last 52 weeks. NVIDIA Corporation (NASDAQ:NVDA) has a market capitalization of $1.05 trillion.
St. James Investment Company made the following comment about NVIDIA Corporation (NASDAQ:NVDA) in its second quarter 2023 investor letter:
“The AI ‘bell cow’ leading the new investment narrative is NVIDIA Corporation (NASDAQ:NVDA), currently priced at a level where its free cash flow yields only 0.45% for its shareowners; by comparison, riskless U.S. Treasury Bills now yield 5.3%. Unfortunately, 70% of Nvidia’s meager cash yield of 0.45% is further eroded by stock-based compensation (SBC) for its employees and management. The company’s stock compensation plan consumes $2.8 billion of the company’s $28 billion annual revenue but shares outstanding have not decreased. Nvidia’s market capitalization is 37% greater than Berkshire Hathaway. However, when comparing fundamentals, Berkshire Hathaway generated $23 billion in free cash flow over the past four quarters while Nvidia generated only $2.6 billion (SBC adjusted). Furthermore, Berkshire Hathaway does not dilute shareholders with stock-based compensation. Despite a wide array of available investment options, market participants have overwhelmingly favored a select few dominant technology companies.
At its current price of $423, Nvidia is valued at forty times its annual revenue. If one heroically assumes that the company manages to compound revenue by 50% per year for three years, it will “only” trade at a multiple of twelve times hypothetical sales in 2026…hardly a screaming bargain. Of course, market history has an interesting way of repeating itself. The most exaggerated technology bubble occurred in 1928-29 when the Radio Corporation of America (RCA) captured the imagination of every speculator on Wall Street. RCA’s trading volume sometimes accounted for 20% of the total volume on the New York Stock Exchange. At the stock price peak in September 1929, the company was “valued” at $665 million. Sales increased from $65 million in 1927 to $102 million in 1928 to $182 million in 1929. Therefore, at the peak of the RCA stock buying frenzy, the company was “valued” at a multiple of “only” 3.6 revenue. Forty-five years later, in 1974, RCA’s annual sales were $4.6 billion, yet the stock price bottomed that year at $38, about one-third of its 1929 stock price high.?
While most rational investors consider Nvidia ‘slightly’ overvalued, market momentum could push fantasy valuations higher. Comparing the 1929 period of RCA and the current situation with Nvidia in 2023, one observes a similar pattern where most stocks experience decline while a handful of large companies powered the major indices higher. In both instances, unsuspecting investors maintained the illusion that the “market” was healthy.”
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NVIDIA Corporation (NASDAQ:NVDA) is in 17th position on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 132 hedge fund portfolios held NVIDIA Corporation (NASDAQ:NVDA) at the end of first quarter which was 106 in the previous quarter.
We discussed NVIDIA Corporation (NASDAQ:NVDA) in another article and shared the list of best NASDAQ dividend stocks to buy. In addition, please check out our hedge fund investor letters Q2 2023 page for more investor letters from hedge funds and other leading investors.
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Disclosure: None. This article is originally published at Insider Monkey.
