tiprankstipranks
Nvidia: New Markets, Strong Growth, Too Expensive Now
Stock Analysis & Ideas

Nvidia: New Markets, Strong Growth, Too Expensive Now

NVIDIA Corp. (NVDA) designs and manufactures computer graphics processors, chipsets, and related multimedia software with two main segments: the Graphics segment and the Compute & Networking segment. Founded in 1993, Nvidia is headquartered in California.

Nvidia is synonymous with high growth in revenue, earnings, and beating expectations, having a very strong track record of positive financial results.

Amid a global chip shortage, Nvidia Corporation delivered stellar financial results for the third quarter of the Fiscal Year 2022. With gains of nearly 140% in 2021, shares of Nvidia are trading at a high valuation.

The expectations are too high for growth to continue over the next few quarters and years. I am bearish on NVDA stock, as I consider it is trading at a very rich premium now. (See Analysts’ Top Stocks on TipRanks)

A History of Beating EPS Estimates

Nvidia has delivered 16 consecutive quarters of beating EPS estimates. This trend goes back to Q4 2017. Its EPS has been increasing for the past eight straight quarters.

TipRanks’ Smart Score

When looking at the TipRanks Smart Score rating system, Nvidia scores a Perfect 10.

This implies that NVDA stock will outperform based on key market factors. These factors include Wall Street analyst ratings, corporate insider transactions, financial blogger opinions, individual investor sentiment, hedge fund manager activity, and fundamentals, to name a few.

Third Quarter Results: A Beat on Earnings and Revenue

Earnings are a critical catalyst that moves a stock, and Nvidia delivered a solid third-quarter 2022 earnings report, continuing its strong momentum in 2021.

Here are some key highlights from the quarter: “Record revenue of $7.1 billion, up 50% from a year earlier. Record Data Center revenue of $2.94 billion, up 55% from a year earlier. Record Gaming revenue of $3.22 billion, up 42% from a year earlier.”

When you read about record revenue three times, you know it was a stellar quarter for Nvidia. The Refinitiv consensus expectations for adjusted earnings and revenue were $1.11 and $6.82, respectively. Nvidia reported adjusted earnings of $1.17 and revenue of $7.10 billion, respectively.

There was more good news as Nvidia raised its guidance, stating it is expecting around $7.4 billion in the current quarter, ending in January, higher than the analyst expectations of $6.86 billion.

However, analyzing its financial results showed that Nvidia is exploring growth in new dynamic markets such as Omniverse.

Jensen Huang, founder and CEO of NVIDIA, said that “Omniverse was a major theme at GTC. We showed what is possible when we can jump into virtual worlds. Omniverse will be used from collaborative design, customer service avatars, and video conferencing, to digital twins of factories, processing plants, even entire cities. Omniverse brings together NVIDIA’s expertise in AI, simulation, graphics, and computing infrastructure. This is the tip of the iceberg of what’s to come.”

Omniverse is Nvidia’s concept for the metaverse. A potentially tremendous market opportunity to explore and profit from.

As expected, the biggest market for Nvidia continues to be the gaming market. Another very strong market was Data Center revenue with a record $2.94 billion, up 55% from a year earlier and up 24% from the previous quarter. Professional Visualization, which relates to Omniverse, performed very well, with record revenue of $577 million, up 144% from a year earlier and 11% from the previous quarter.

Automotive revenue for the third quarter was $135 million, up 8% from a year earlier and down 11% from the previous quarter. It may seem such as a laggard sector for Nvidia.

Nevertheless, we should consider that a company with such diverse applications ranging from supply-chain logistics, cybersecurity, robotics, self-driving cars, climate science, and digital biology is expected to have some sectors that cannot keep up with the rapid growth of other hot sectors.

It’s worth mentioning that Nvidia is even providing solutions for professional crypto mining operations, offering its dedicated GPU CMP HX. According to the company, this GPU is optimized for the best mining performance.

Valuation: The Biggest Hurdle for Investors Now

Nvidia shines at long-term growth for revenue, operating income, net income, and EPS. Nvidia’s 10-year average growth for revenue, operating income, net income, and EPS are 16.8%, 36.4%, 32.8%, and 32%, respectively.

Analysts expect annual earnings growth of 16.3% for the next one to three years. NVDA’s earnings are expected to grow faster than the U.S. market in the same period (14.4% per year).

Considering the valuation for this growth stock, though, is what makes Nvidia too risky now, implying it is too expensive. NVDA is expensive based on its P/E Ratio (97.2x) compared to the U.S. market (17.7x). NVDA is expensive based on its PEG Ratio (6x). Ideally, value stocks have a PEG ratio under 1.0x.

Finally, NVDA is considered to be overvalued based on its P/B Ratio (33.5x) compared to the U.S. Semiconductor industry average (4.9x). 

Wall Street’s Take

Turning to Wall Street, NVDA earnings a Strong Buy consensus rating, based on 22 Buys and two Holds. The average Nvidia price target of $359.09 implies 14.8% upside potential.

Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of Tipranks or its affiliates, and should be considered for informational purposes only. Tipranks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. Tipranks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by Tipranks or its affiliates. Past performance is not indicative of future results, prices or performance.

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
Bitcoin

Popular Articles