Nvidia Stock (NASDAQ:NVDA)
Nvidia Corporation (NASDAQ:NVDA) is a pioneer in the AI revolution. ChatGPT’s big surge is adding fuel to an already raging fire; the company has risen 102% since the beginning of the year, suggesting its ability to allow AI adoption across a wide range of markets.
While I believe that NVDA’s dominance will not be challenged in the near term, I am concerned about its “flying to Mars” valuation, as the stock is currently trading at 66x P/E CY 2023 (compared to TSLA’s 43x), the highest multiple in the technology sector. This high multiple for a profitable corporation was only witnessed during the post-pandemic bull market when the federal funds rate was at its lower bound of 0. However, considering the current interest rate at 5.25%, I believe the recent rally is overdone. As a result, despite a strong long-term growth forecast, I’m tactically pessimistic about Nvidia stock in the short run.
On March 21, 2023, Nvidia hosted its GTC Financial Analyst Q&A, emphasizing the cloud business model and its capacity to meet rising demand. The value of the company’s software solutions continues to grow. Furthermore, Nvidia provides platform-as-a-service and AI infrastructure-as-a-service to customers at all levels of the value chain. During the webcast, the CFO also mentioned a surge in AI computes demand in the past month, which was more positive than the previous earnings call outlook, further fueling the recent bullish sentiment.
The company’s cloud-based service solutions, including DGX Cloud, which allows organizations to train and run a wide range of current and emerging AI workloads, were one of the most interesting announcements at GTC. While the team restated its expectation of an increasing demand profile for its data center business in the short and medium term, the economic models for some of these potential business prospects remain questionable. Given the market’s pricing in multi-year tailwinds, the stock’s current risk and reward profile is not very appealing.
The company’s revenue growth has slowed down significantly to 0.2% YoY from 61.4% a year earlier due to the negative effect of pull-forward demand and macro headwinds. However, rather than a specific issue with the company, I believe this was largely due to a high bar basis and weak demand in the semiconductor industry. Particularly, the Graphics segment saw a revenue deceleration of 25% YoY largely due to a PC slowdown in the post-pandemic era, resulting in a CAGR of 15.9% from FY 2020 to FY 2023. The computing and Networking segment, on the other hand, remained resilient and rose 36% year on year, principally led by a 41.4% year-on-year increase in the Datacenter subsegment, which showed the demand resiliency of the company’s cloud services and AI computing. As a result, I believe the stock is already gambling on the future AI craze, with investors driving up the price to reflect the business’s excellent growth prospects, which has already been largely factored in.
According to data from May 5, 2023, NVDA is trading at 24.4x EV/Revenue CY 2023, the highest multiple in the group, compared to 5.9x for the S&P 500 – IT sector average. While some investors may argue that the stock’s steep valuation is justified by its hyper-growth prospects over the next decade, I believe it is overstretched, especially given that it trades at a four times higher EV/Revenue than Advanced Micro Devices, Inc (NASDAQ:AMD). Even if we omit Intel Corporation (NASDAQ:INTC) from the analysis because of its value trap nature, the 66x P/E CY 2023 multiple remains the highest in the group, surpassing Tesla, Inc.’s (NASDAQ:TSLA) 43x multiple.
According to this data, NVDA’s BF P/E ratio and P/S ratio are currently trading at 60x and 22.6x, respectively, approaching the epidemic top when the federal funds rate was at 0. TSLA is now trading at 43x BF P/E and 5x BF P/S in the contract. This suggests that investors are enthused about NVDA’s potential in the AI area in the long term. However, the existing multiples show that the stock’s valuation may not be sustainable in the current climate with a 5.25% interest rate and 5.5% YoY of Core CPI. While the stock may continue to climb in the long run, I remain concerned because the street consensus has yet to be dramatically altered.
Despite the potential for AI adoption to accelerate demand prospects, the market consensus for NVDA’s revenue growth has not caught up with the present price movement. In fact, during the last six months, sell-side analysts have reduced their FY 2023 sales projections by -3.89%. While sales expectations for FY 2023 and FY 2024 were marginally revised upward earlier this year, they have yet to approach last year’s peak levels. This implies that the stock’s recent 100% gain is largely speculative, especially considering the significant drop in long-term revenue expectations.
On the other hand, near-term earnings revisions have remained flat, indicating that the stock price increase is not being driven by an increase in earnings consensus. Over the last six months, earnings projections for FY 2023 have barely increased by 1.66%. While longer-term earnings predictions are less trustworthy, they are nonetheless used to determine a company’s valuation using the discounted cash flow (DCF) model. The market appears to expect that NVDA’s earnings would drastically rise starting in the mid and long term, as the earnings consensus for FY 2026 and FY 2027 has increased by 23% AND 26%, respectively. As a result, I believe that the NVDA stock price doubling in 5 months is excessive.
Conclusion
Finally, Nvidia stock price has increased by more than 100% year to date, fueled by the market’s enthusiasm for AI and its potential to disrupt a variety of industries. Despite the company’s significant future opportunities, there are concerns about the current valuation, which appears to be overstretched based on traditional valuation metrics. Furthermore, the lack of significant upward revisions in revenue and earnings estimates by analysts raises concerns about the stock’s sustainability. While Nvidia Corporation’s stock price may rise in the long run, investors should be wary of the risks associated with the stock’s high valuation and speculative market sentiment.
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