Stock prices represent risk and information asymmetry, not just the P/E ratio.
The big 5 tech companies (google, amazon, microsoft, facebook, apple) primarily do data analysis and software (with apple as a partial exception). That puts each of the five (except apple to some extent, as their thread to hang on is iphone marketing) at the cutting edge of all the things that high-level data analysis is needed for, which is a very diverse game where each of the diverse elements add in a ton of risk (e.g. major hacks, data poisoning, military/geopolitical applications, lighting-quick historically unprecedented corporate espionage strategies, etc).
The big 5 are more like the wild west, everything that’s happening is historically unprecedented and they could easily become the big 4, since a major event e.g. a big data leak could cause a staff exodus or a software exodus that allows the others to subsume most of their market share (imagine how LLMs affected Google’s moat for search, except LLMs are just one example of historical unprecedence (that EA happens to focus way closer on, relative to other advancements, than wall street and DC), and most of the big 5 companies are vulnerable in ways as brutal and historically unprecedented as the emergence of LLMs).
Nvidia, on the other hand, is exclusively hardware and has a very strong moat (obviously semiconductor supply chains are a big deal here). This reduces risk premiums substantially, and I think it’s reasonable likely that they would even be substantially lower risk per dollar than holding stock diversified between all 5 of the big 5 tech companies combined; I think the big 5 set a precedent that the companies making up the big leagues are each very high risk including in aggregate and Nvidia’s unusual degree of stability, while also emerging on the bigleagues stage without diversifying or getting great access to secure data, might potentially shatter the high-risk bigtech company investment paradigm. I think this could cause people’s p/e ratio for Nvidia to maybe be twice or even three times higher than it should, if they depend heavily on comparing Nvidia specifically to google, amazon, facebook, microsoft, and apple. This is also a qualitative risk that can also spiral into other effects e.g. a qualitatively different kind of bubble risk than what we’ve seen from the big 5 over the last ~15 years of the post-2008 paradigm where data analysis is important and respected.
tl;dr Nvidia’s stable hardware base might make comparisons to the 5 similarly-sized tech companies unhelpful, as those companies probably have risk premiums that are much higher and more difficult to calculate for investors.
I agree risk also comes into it – it’s not a risk-neutral expected value (I discuss that in the final section of the OP).
Interesting suggestion that the Big 5 are riskier than Nvidia. I think that’s not how the market sees it – the big 5 have lower price & earnings volatility and lower beta. Historically chips have been very cyclical. The market also seems to think there’s a significant chance Nvidia loses market share to TPUs or AMD. I think the main reason Nvidia has a higher PE ratio is due its earnings growth.
My bad- I should have looked into Nvidia more before commenting.
Your model looked like something that people were supposed to try to poke holes in, and I realized midway through my comment that it was actually a minor nitpick + some interesting dynamics rather than a significant flaw (e.g. even if true it only puts a small dent in the OOM focus).
Stock prices represent risk and information asymmetry, not just the P/E ratio.
The big 5 tech companies (google, amazon, microsoft, facebook, apple) primarily do data analysis and software (with apple as a partial exception). That puts each of the five (except apple to some extent, as their thread to hang on is iphone marketing) at the cutting edge of all the things that high-level data analysis is needed for, which is a very diverse game where each of the diverse elements add in a ton of risk (e.g. major hacks, data poisoning, military/geopolitical applications, lighting-quick historically unprecedented corporate espionage strategies, etc).
The big 5 are more like the wild west, everything that’s happening is historically unprecedented and they could easily become the big 4, since a major event e.g. a big data leak could cause a staff exodus or a software exodus that allows the others to subsume most of their market share (imagine how LLMs affected Google’s moat for search, except LLMs are just one example of historical unprecedence (that EA happens to focus way closer on, relative to other advancements, than wall street and DC), and most of the big 5 companies are vulnerable in ways as brutal and historically unprecedented as the emergence of LLMs).
Nvidia, on the other hand, is exclusively hardware and has a very strong moat (obviously semiconductor supply chains are a big deal here). This reduces risk premiums substantially, and I think it’s reasonable likely that they would even be substantially lower risk per dollar than holding stock diversified between all 5 of the big 5 tech companies combined; I think the big 5 set a precedent that the companies making up the big leagues are each very high risk including in aggregate and Nvidia’s unusual degree of stability, while also emerging on the bigleagues stage without diversifying or getting great access to secure data, might potentially shatter the high-risk bigtech company investment paradigm. I think this could cause people’s p/e ratio for Nvidia to maybe be twice or even three times higher than it should, if they depend heavily on comparing Nvidia specifically to google, amazon, facebook, microsoft, and apple. This is also a qualitative risk that can also spiral into other effects e.g. a qualitatively different kind of bubble risk than what we’ve seen from the big 5 over the last ~15 years of the post-2008 paradigm where data analysis is important and respected.
tl;dr Nvidia’s stable hardware base might make comparisons to the 5 similarly-sized tech companies unhelpful, as those companies probably have risk premiums that are much higher and more difficult to calculate for investors.
I agree risk also comes into it – it’s not a risk-neutral expected value (I discuss that in the final section of the OP).
Interesting suggestion that the Big 5 are riskier than Nvidia. I think that’s not how the market sees it – the big 5 have lower price & earnings volatility and lower beta. Historically chips have been very cyclical. The market also seems to think there’s a significant chance Nvidia loses market share to TPUs or AMD. I think the main reason Nvidia has a higher PE ratio is due its earnings growth.
My bad- I should have looked into Nvidia more before commenting.
Your model looked like something that people were supposed to try to poke holes in, and I realized midway through my comment that it was actually a minor nitpick + some interesting dynamics rather than a significant flaw (e.g. even if true it only puts a small dent in the OOM focus).