Shares of graphics chipmaker Nvidia (NVDA) have continued to post magnificent results in recent quarters, but this hasn’t stopped shares from sagging lower in recent weeks. I am bearish on the stock.
The recent market sell-off has been unforgiving, and the highest-momentum names over the past two years have suddenly seen their momentum reverse course.
For Nvidia, the pain has been far greater than your average tech stock, with a 36% drop from peak to trough now in the rearview. While the company has enviable profitability prospects and a high, sustainable growth rate, the stock has always traded at a lofty multiple.
At 58 times trailing earnings, NVDA stock is still frothy in a market where the fear of higher rates is causing investors to question the price they’re paying for growth. Simply put, this market doesn’t reward high-growth firms that don’t have a clear path to greater profitability. Those, like Nvidia, who have a road to higher profits still stand to take a hit to the chin, given their extended multiples.
While it’s unlikely that an innovative disruptor like Nvidia will ever trade at a “cheap” price-to-earnings multiple, given how many front-row seats it has to some of the most intriguing emerging areas of tech (from the omniverse to next-generation AI technologies).
Still, the valuation reset is a long time coming. In due time, Nvidia stock will bottom out, and earnings (as well as positive guidance) will be able to move the needle higher again. Until then, Nvidia stock is a risk-on play that could easily continue lower.
Now, Nvidia may be one of the highest-quality companies with one of the most brilliant visionary leaders in Jensen Huang. That said, we’ve seen many widely-praised high-multiple tech companies see their share prices cut in half. Will Nvidia suffer the same fate? It’s hard to tell, but I would not be surprised to see it happen.
While NVDA stock deserves to trade at a premium to its peer group, just how much of a premium is a mystery at this juncture. Further, the Nasdaq’s bear-market plunge could cause NVDA stock to plunge well below its intrinsic value.
Although I’m such a fan of Jensen Huang and his team, I’m no fan of the stock. As such, I am bearish on NVDA stock because above $200 per share, the price of admission is just way too steep, given the alternatives out there.
Great Company, Suspect Valuation
Nvidia is one of those growth companies that’s really hard not to get excited about. The firm is firing on all cylinders and shows signs that it’s worthy of joining the likes of FAANG. While I do think Nvidia and its team could climb above the $1 trillion level in a couple of years, I believe that a further decline could precede such a rise.
Despite being one of the most ambitious AI and graphics-processing hardware firms, with so many jaw-dropping innovative demos and a management team that knows how to deliver, the valuation has become so extended that the stock is essentially crumbling under its own weight.
You really can’t fault anything about the company for its latest drawdown. The company closed fiscal-year 2022 with a bang, with 61% top-line growth. These are remarkable numbers, and there wasn’t any hair on the firm’s final quarter. Investors just don’t like high-multiple stocks right now.
Looking ahead, demand is likely to remain strong. As supply-chain pressures gradually ease, Nvidia will meet the demand. Until then, expect supply woes to persist. Fortunately, supply constraints don’t seem to be curbing the firm’s ability to innovate. It’s on the cutting edge, and Nvidia is definitely a name worth stashing on the radar.
Until then, the 20.8 times sales multiple is the biggest knock against the firm. It’s hard to know how much positivity is baked into the share price.
Although I expect Nvidia to continue crushing quarterly results, it’s tough to get behind a firm where a “beat and raise” no longer cuts it. Even high-quality firms far less expensive than Nvidia have failed to offset broader negative pressure on their share prices.
Wall Street’s Take
Turning to Wall Street, NVDA stock comes in as a Strong Buy. Out of 21 analyst ratings, there are 17 Buys and four Hold recommendations.
The average Nvidia price target is $352.65, implying an upside potential of 57.1%. Analyst price targets range from a low of $245.00 per share to a high of $400.00 per share.
The Bottom Line on Nvidia Stock
Nvidia is still a great company that will do well over the long run. However, much of the firm’s bright future is already baked into the stock.
Indeed, exogenous shock-induced headwinds outside of Nvidia’s control, most notably ongoing supply chain woes, are likely to take a stride out of Nvidia’s step. The company itself is doing a magnificent job of moving through these trying times. Still, I don’t think it will be enough to justify its hefty multiple in such a vicious valuation reset.
For now, I view Nvidia as akin to Amazon (AMZN) during the tech bubble burst of 2000. The company will rise out of this vicious downturn, but when and how remain the question marks.
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