Shares of Nvidia (NASDAQ:NVDA) have been on a remarkable run this year, and many analysts aren’t yet ready to turn on the graphics-processing unit (GPU) maker. Next week, Nvidia is heading into earnings, with the Q2 report on tap for August 23, 2023. There’s a lot on the line, with expectations for $2.08 in earnings per share (EPS) and raging bulls who want to see a repeat of the incredible post-earnings pop the stock enjoyed in late May.
Though it’s certainly possible that Nvidia shocks and awes to the upside yet again as demand for the best AI chips continues to surge, I just don’t feel comfortable paying the current price of admission into a name that may be pricing in many years’ worth of growth right here. As such, I’m staying bearish for the time being.
Indeed, the rise of AI is real, and while Nvidia seems to be head and shoulder above its rivals in the artificial intelligence (AI) chip space, it’s hard to tell when the boom will turn into a bust. At these heights, I’d rather enjoy the spectacle that is Nvidia’s coming quarterly results from the sidelines.
The AI Chip Boom Won’t Last Forever
Many tech startups and juggernauts have been rushing to get their picks and shovels to unearth the gold to be had from the AI revolution. There really hasn’t been enough to go around of late. However, there will be enough firms with enough hardware firepower in due time, and AI chip supply could begin to outpace demand. When the time comes, Nvidia stock could be in a spot to really drag its feet. After all, the boom-and-bust nature is to be expected when it comes to the chipmakers.
Now, it seems unlikely that the next quarter will see AI chip sales go bust. There’s still plenty of demand for the latest and greatest AI chips as companies look to power their own generative AI applications. The bulls would argue Nvidia could have more upside surprises up its sleeves as it seizes what appears to be a generational opportunity.
As it stands, we’re still likely in the very early innings of the AI race, with many firms that are more than willing to over-order hot commodities like the Nvidia H100 chip. Even with potential recession risks, the massive $40,000 price tag on the H100 doesn’t seem to be curbing the desire to buy. If anything, firms, big and small, are ready to hand over their money to punch their ticket or improve their positioning in the AI race. Still, there could be a bust cycle eventually.
Chip Demand Could Continue to Awe, but Chasers May Not Benefit
While I do think AI chip sales will keep going strong, I’m not so sure investors who get in here, at more than $430 per share, will be able to benefit much. Not when so many analysts expect Nvidia’s visionary CEO Jensen Huang to keep knocking the results out of the park.
Indeed, the stock looks incredibly expensive at 226.7 times trailing price-to-earnings, which is above and beyond the semiconductor industry average of 34.9 times.
Of course, Nvidia has emerged as not only an AI-focused semiconductor play but the best AI-focused semiconductor play on the planet. With that comes a considerable premium. That said, at nearly 42 times price-to-sales (also miles ahead of the semiconductor industry average of 7.34), a case could be made that the stock sports a pretty bubbly premium at these levels.
Simply put, AI chip sales do not need to go bust for the stock to fall into a big slump. If the ongoing boom isn’t as big as the bulls expect, the stock could still be in a spot to surrender a big chunk of the year’s gains.
Is Nvidia Stock a Buy, According to Analysts?
On TipRanks, NVDA stock comes in as a Strong Buy. Out of 34 analyst ratings, there are 32 Buys and two Holds. The average Nvidia stock price target is $521.77, implying an upside of 20.5%. Analyst price targets range from a low of $440.00 per share to a high of $800.00 per share.
The Bottom Line on Nvidia Stock, Going Into Earnings
Nvidia stock looks just too risky for most value-conscious investors at these levels. Even if demand stays hotter for a few more quarters, investors could still lose money as expectations eventually overshoot to the upside. While I’m a massive fan of Nvidia, the business, I can’t justify paying the premium price tag, going into a quarter where the bar has been raised.
