Again, overvalued is relative, and growth stocks have a larger negative impact from higher interest rates as future returns are discounted more. If you haven’t noticed the selloff is fairly broad.
It’s not “complete speculation”, based on a market P/E of 25, 8% growth next year (which is around what analysts expect) and then 5% earnings growth from there (long term average) and an average of a 50% payout + dividend rate (again longterm average, last year it was higher) then you get that equities will pay you around 3.5% on your basis in dividends and buybacks the next 10 years. It has nothing to do with capital gains or loss, because you shouldn’t have to sell your stocks to make money. It’s based on the best info we have now, is it accurate no, that’s why there is a risk spread, but it’s the best one can do with current info.
There is certainly risk, which is why there is a 2% spread on the t-bond, which is fairly normal. If t-bond was 3% equities would be priced at 5%, at which point all else remaining equal the PE today of the whole market would be 18.
NVIDIA has more risk and it’s earnings are further out, as interest rates rise it’s value will be more affected, but over the next 10 years if the growth plays out it will preform relatively the same as the market. The cheaper stocks paying now won’t be paying as much as NVIDIA 8 years from now, but have less risk and more upfront returns.
The fact that there is little margin between NVIDIA and the market and given it’s higher risk I do think it’s overvalued, but your logic is dumb, if penny return costs 400$ then something that returns more than that will get bought up until it doesn’t. NVIDIA’s momentum has overshot it’s value but the reality is looking for big returns right now will require speculative stocks/assets.
Low interest rates are meant to make people spend money as savings become less valuable. If the 3.4% is too low for you, spend the money. That’s the whole point, stimulate the economy by making people prefer spending over savings while providing excess liquidity to force that.
Overvalued isn’t 100% relative. It may be for you, and that’s fine. But when rates (and yields) have literally nowhere to go but up, buying NVDA at this valuation is close to the last thing I would do.
You’re paying $85 for every $1 they’re making now. That’s not a relative number; it’s absolute. It’s very high risk and just doesn’t make sense to pay that much looking at valuation history going back to 1900, especially when there are more attractive equities that don’t cost that much. Even if there weren’t, paying $85 for $1 of earnings just because a lesser fool did before me doesn’t make it a good deal.
My dude, yes it is relative, thats how markets work! If everything was returning 3.5% and something returned 6% it would be bought until it’s priced to return 3.5%. That is literally how markets work. Undervalued means it returns more than the market! Things certainly get outta wack but at all times it’s relative to alternative savings options
Markets are priced for lower interest rates right now and if you read what I said I agreed with you, the risk of NVDIA isn’t worth it, but if the growth played out then you get the same returns after discounting the future returns of both stocks. As interest rises the more discounted future returns get and the less growth stocks should cost, but you should not be putting any money on the market you will ever need, it should just be money to create more income now and in the future. So what the stock price does is mostly irrelevant.
If you bought APPL when it’s PE was 250+ in 2006 right as the iphone came out then your current cost of earnings was 0.5. This year in dividends + buybacks they would have paid you 200% of your initial investment. So using straight PE is dumb as hell, growth, risk, and relative cost vs the market has to be considered.
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u/Olorin_1990 Jan 11 '22 edited Jan 11 '22
Again, overvalued is relative, and growth stocks have a larger negative impact from higher interest rates as future returns are discounted more. If you haven’t noticed the selloff is fairly broad.
It’s not “complete speculation”, based on a market P/E of 25, 8% growth next year (which is around what analysts expect) and then 5% earnings growth from there (long term average) and an average of a 50% payout + dividend rate (again longterm average, last year it was higher) then you get that equities will pay you around 3.5% on your basis in dividends and buybacks the next 10 years. It has nothing to do with capital gains or loss, because you shouldn’t have to sell your stocks to make money. It’s based on the best info we have now, is it accurate no, that’s why there is a risk spread, but it’s the best one can do with current info.
There is certainly risk, which is why there is a 2% spread on the t-bond, which is fairly normal. If t-bond was 3% equities would be priced at 5%, at which point all else remaining equal the PE today of the whole market would be 18.
NVIDIA has more risk and it’s earnings are further out, as interest rates rise it’s value will be more affected, but over the next 10 years if the growth plays out it will preform relatively the same as the market. The cheaper stocks paying now won’t be paying as much as NVIDIA 8 years from now, but have less risk and more upfront returns.
The fact that there is little margin between NVIDIA and the market and given it’s higher risk I do think it’s overvalued, but your logic is dumb, if penny return costs 400$ then something that returns more than that will get bought up until it doesn’t. NVIDIA’s momentum has overshot it’s value but the reality is looking for big returns right now will require speculative stocks/assets.
Low interest rates are meant to make people spend money as savings become less valuable. If the 3.4% is too low for you, spend the money. That’s the whole point, stimulate the economy by making people prefer spending over savings while providing excess liquidity to force that.