Nvidia Stock (NASDAQ:NVDA): The Rocket Ride Can’t Last Forever
Stock Analysis & Ideas

Nvidia Stock (NASDAQ:NVDA): The Rocket Ride Can’t Last Forever

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There’s no denying that Nvidia’s quarterly results exceeded Wall Street’s projections, but the rally in NVDA stock has been absolutely explosive. Now, Nvidia has to live up to its optimistic current-quarter guidance and justify its lofty valuation.

Nvidia (NASDAQ:NVDA) stock is on a rocket ride today, but be careful, as the euphoric sentiment likely won’t last forever. I am neutral on NVDA stock because Nvidia’s Fiscal Q1-2024 results weren’t as great as some folks might assume they are. Plus, the company’s current-quarter sales guidance sets a high bar that Nvidia will now have to clear.

Nvidia is a chip giant that’s known for manufacturing graphics processing units (GPUs) for video game consoles. However, people are strongly focused on machine learning in 2023. Investors are highly interested in Nvidia this year because the company makes hardware components that power applications for generative artificial intelligence (AI).

As we’ll discover, Nvidia is riding high on the AI trend, and analysts are taking note of this. Yet, it may be time to exercise caution as NVDA stock goes vertical, and some analysts’ price targets bake a great deal of future growth into the cake.

NVDA Stock Goes from Steep Rise to Absolutely Vertical

In times like this, financial traders have to keep a cool head and avoid headline hype. That’s easier said than done when everybody is bullish on Nvidia and when NVDA stock gained 24.35% in a single trading session today.

It’s fine to be bullish on Nvidia, but the market’s sentiment has crossed the line into utter euphoria now. The news sentiment surrounding Nvidia is almost entirely positive, and bloggers are mostly bullish on NVDA stock. Furthermore, the crowd wisdom indicator on Nvidia is strongly positive. These are important factors to monitor, as they could actually be used as contrarian indicators to gauge how people feel about a particular company and stock.

Meanwhile, Nvidia stock bounced from its October 2022 low of around $112 to nearly $395 earlier today. Certainly, the stock can go higher and I wouldn’t dare to make a bearish call on Nvidia. I’ll admit, it probably won’t be long before Nvidia’s market cap hits $1 trillion (currently near $940 billion), at which point more bandwagon-jumping traders will likely start buying the stock.

Just remember that vertical share price moves can stretch a company’s valuation. In the case of Nvidia, its GAAP trailing 12-month price-to-earnings (P/E) ratio of over 175.5x is substantially higher than the sector median of 23.6x. Nvidia’s trailing price-to-book (P/B) and price-to-sales (P/S) ratios are also far above their sector medians.

The problem is that many people simply don’t care about Nvidia’s valuation right now. They’re focused on anything and everything related to AI now. Additionally, they’re picking out the positive points from Nvidia’s Q1 earnings and guidance. So, let’s delve into the details now.

Price Targets for Nvidia Stock May be Too High

JPMorgan Chase (NYSE:JPM) analyst Harlan Sur literally just doubled its price target on NVDA stock from $250 to $500. Meanwhile, Wedbush analyst Matt Bryson raised his price target on Nvidia shares from $290 to $490. Do Nvidia’s results really justify these ultra-optimistic price targets, though?

Again, I suspect that the current euphoria surrounding Nvidia is due to the market’s obsession about AI. Surely, it’s not a coincidence that both Sur and Bryson mentioned AI in their commentary to justify their lofty NVDA stock price targets. Additionally, Nvidia CEO Jensen Huang emphasized in the company’s first-quarter earnings call that the rise of generative AI has been Nvidia’s “iPhone moment.”

Here’s what bothers me, though. Nvidia’s Fiscal Q1-2024 sales of $7.19 billion did beat the consensus forecast of $6.52 billion but also decreased 13.3% year-over-year. Additionally, Nvidia’s Gaming segment revenue fell 38% on a year-over-year basis.

I’ll admit, it’s commendable that Nvidia’s quarterly earnings per share of $1.09 outpaced Wall Street’s estimate of $0.92 per share. That’s a decent beat, but it’s probably not what prompted the explosive move in NVDA stock. Rather, I suspect that the primary catalyst (besides the AI obsession) was Nvidia’s current-quarter revenue guidance of $11 billion, which greatly exceeds the analyst consensus estimate of $7.11 billion.

Buying a stock based on a company’s ultra-optimistic forward guidance is a risky bet, in my opinion. The assumption of a very strong revenue result for Nvidia is currently being priced into NVDA stock, it seems. This feels like a setup for potential disappointment in three months when Nvidia releases its next quarterly report.

Is NVDA Stock a Buy, According to Analysts?

Turning to Wall Street, NVDA stock is a Strong Buy based on 26 Buys and seven Hold ratings. The average Nvidia stock price target is $313.59, implying 17.4% downside potential.

If you’re wondering which analyst you should follow if you want to buy and sell NVDA stock, the most profitable analyst covering the stock (on a one-year timeframe) is Matt Ramsay of TD Cowen, with an average return of 103.13% per rating and a 93% success rate. See below.

Conclusion: Should You Consider Nvidia Stock?

Nvidia is an innovative company with leading-edge tech components. It’s fine that so many people are super bullish on Nvidia stock. However, contrarian investors might be reluctant to take a share position as a lot of future success appears to have been priced into the stock already.

It would be dangerous to short-sell NVDA stock, but the risk-to-reward proposition doesn’t look favorable for a long position. Therefore, I’m feeling neutral about Nvidia, and cautious investors should monitor the company and the stock but don’t have to give in to the crowd-fueled buying frenzy right now.



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