Elevator Pitch
I still keep my Neutral rating for Nvidia Corporation (NASDAQ:NVDA).
Nvidia's stock price went up over 40% since January 2021, and its current share price is only -5% below its all-time historical high registered in early July 2021. I think Nvidia stock is going up, because of its good financial performance, a smaller-than-expected negative impact relating to the semiconductor chip shortage, and optimism regarding the Arm acquisition.
Nvidia currently trades at consensus forward FY 2023 EV/EBITDA and P/E multiples of 46.1 times and 45.5 times, respectively, and I view Nvidia's stock as a Hold with its lofty valuations as the key reason for not having a Bullish rating on the stock.
Nvidia Stock Price
This current article is an update of my initiation piece on NVDA that was published two months ago. Nvidia's stock price has increased by +18% from $167.78 as of June 2, 2021 to $197.50 as of August 2, 2021. In fact, Nvidia's stock price went up over 40% since January 2021 or the beginning of the year.
NVDA's Stock Price Chart
Source: Seeking Alpha
This also implies that Nvidia Corporation's current share price is only -5% off its historical share price peak of $208.75 that was recorded on July 7, 2021. Furthermore, Nvidia's amazing stock price run didn't just start this year. NVDA's shares were up +119% last year from $59.84 as of January 2, 2020 to $130.48 as of December 31, 2020.
To evaluate Nvidia Corporation as a potential investment candidate, it is necessary to know why the company's shares have performed so well, and whether the share price run is justified. This is the subject of the next section of my article.
Why is Nvidia Stock Going Up?
I think that Nvidia stock is going up for three key reasons.
Firstly, Nvidia Corporation's recent financial performance has been excellent, to say the least, and both its key markets, gaming and data centers, are both doing very well.
NVDA's Q1 FY 2022 (YE January 31) revenue was $5,661 million, which represented a +84% YoY and a +13% QoQ increase. More significantly, Nvidia Corporation's most recent quarterly top line were +7% and +5% higher than the company's management guidance and Wall Street analysts' consensus sales estimate, respectively. It is also noteworthy that Nvidia's top line registered in the first quarter of fiscal 2022 was the highest quarterly revenue in the company's history.
Nvidia Corporation's non-GAAP adjusted earnings per share also more than doubled from $1.80 in Q1 FY 2021 to $3.66 in Q1 FY 2022. On a QoQ basis, NVDA's bottom line expanded by +18% as compared to its Q4 FY 2021 adjusted earnings per share of $3.10. Nvidia did not disappoint the market, as its non-GAAP earnings per share in the first quarter of FY 2022 was +12% better than market consensus' quarterly earnings per share forecast of $3.28.
The company's gaming and data center markets, which contributed in aggregate 87% of its FY 2021 sales, were the key drivers of its good start to the new fiscal year 2022.
Nvidia's gaming revenue grew by +11% QoQ and +106% YoY to $2.76 billion in Q1 FY 2022, and the company thinks that "record desktop and laptop GPU (graphics processing unit) sales" and the growth in "crypto mining" drove the significant increase in its gaming revenue. In the near term, the RTX upgrade cycle will provide support for sustained gaming revenue growth. Nvidia has stressed at its recent Q1 FY 2022 earnings call that "we're at the very beginning of the RTX 30 cycle which delivers our biggest generational leap in performance ever", and disclosed the "the vast majority of our GPU installed base" has not upgraded.
Separately, NVDA's data center revenue in Q1 FY 2022 came in at $2.05 billion, which was equivalent to QoQ and YoY growth rates of +8% and +79%, respectively. In my prior June 4, 2021 article on the company, I noted that Nvidia Corporation's acquisition of Mellanox Technologies (MLNX) in early 2020 had allowed the company to cross-sell Mellanox Technologies' offerings to its existing customers. This remained a key growth driver for Nvidia's data center business in Q1 FY 2022, with the company acknowledging at its recent quarterly results briefing that it "had strong results with Mellanox networking products." Looking forward, Nvidia's new A100 datacenter GPU is still at the initial stage of adoption, and the company has already guided for "strengthening demand in coming quarters" in relation to A100.
Secondly, there were worries that the current semiconductor chip shortage could have a severe negative impact on Nvidia Corporation. NVDA's strong Q1 FY 2022 financial results suggest that such concerns could be overdone.
More importantly, Nvidia Corporation provided clarifications on the effects of the chip shortage on its business operations at the Bank of America (BAC) Global Technology Conference in early June 2021. At the BAC conference, NVDA clarified that the chip shortage has largely affected its gaming segment, with a limited impact on the company's data center and other businesses. Nvidia also emphasized at the recent BAC conference that its "dual-foundry strategy" enabled it to "use the full capabilities of our supply chain for longer planning cycles" which "has helped us in our current environment." Since the early 2000s, Nvidia has reduced its reliance on Taiwan Semiconductor Manufacturing Company Limited (TSM) by establishing a partnership with International Business Machines Corporation (IBM).
Specifically for the gaming business, Nvidia has dealt with the chip shortage issue by launching a new product line catering to the needs of cryptocurrency miners known as NVIDIA CMP HX, so that its core gaming customers or users are less affected by issues relating to product supply.
Thirdly, investors are generally positive on Nvidia's proposed acquisition of Arm Limited and the deal's associated synergies (as highlighted in the chart below).
Synergies Associated With Proposed Acquisition Of Arm Limited
Source: Nvidia's Dedicated Website On The Proposed Arm Acquisition
There is a relatively decent probability that the Arm deal will go through successfully. The key chipmakers are in favor of the transaction, according to a June 27, 2021 Seeking Alpha news article. Nvidia also revealed at the June 2021 BAC investor conference that the company is having "very great conversations" with Arm's customers, many of which overlap with Nvidia, and it stressed that "many of them truly understand the benefits of" the deal.
A potential deal-breaker will be a failure to obtain the relevant regulatory approvals. It was reported last week that the regulatory review of the Arm transaction has been pushed backwards by the Chinese authorities. Nevertheless, Nvidia has stated at the BAC conference that "the discussions right now are going well with overall regulators" and they "are proceeding as anticipated." There is no doubt that excitement over the Arm acquisition has been one of the factors driving NVDA's share price.
In the subsequent section, I will discuss about Nvidia's valuations.
Is Nvidia Stock Overvalued?
Considering Nvidia's excellent share price performance year-to-date and in 2020, it is inevitable that there are questions about Nvidia stock's valuations.
Based on its last traded price of $197.50 as of August 2, 2021, Nvidia Corporation is valued by the market at 49.3 times consensus forward FY 2022 EV/EBITDA and 46.1 times consensus forward FY 2023 EV/EBITDA, according to S&P Capital IQ's market consensus data. NVDA also trades at consensus forward FY 2022 and FY 2023 normalized P/E multiples of 50.0 times and 45.5 times, respectively. Nvidia's valuations are certainly not cheap on an absolute basis, and they are also expensive as compared to its peers, as per the peer valuation comparison table below.
Nvidia Corporation's Peer Valuation Comparison
| Stock | Consensus Current Fiscal Year EV/EBITDA Multiple | Consensus Forward One Fiscal Year EV/EBITDA Multiple | Consensus Current Fiscal Year Normalized P/E Multiple | Consensus Forward One Fiscal Year Normalized P/E Multiple |
| Intel Corporation (INTC) | 7.2 | 7.0 | 11.2 | 12.1 |
| Advanced Micro Devices, Inc. (AMD) | 32.8 | 26.4 | 43.7 | 36.0 |
Source: S&P Capital IQ
As another means of assessing NVDA's current valuations, it is noteworthy that the mean sell-side analyst target price for Nvidia is $193.6 based on S&P Capital IQ, which is lower than the company's current share price of $197.50.
In conclusion, I view Nvidia stock as overvalued to a large extent.
Is Nvidia Stock A Buy, Sell, Or Hold?
Nvidia stock is a Hold. In summary, Nvidia's shares have performed very well since January 2021, and this is reflected in the stock's rich forward P/E and EV/EBITDA valuations. Nvidia's good recent financial performance, a smaller-than-expected negative impact relating to the semiconductor chip shortage, and the proposed Arm acquisition are all positives for the stock. But the risk-reward for Nvidia is not attractive in view of its valuations, which justifies rating the company's shares as Hold.
NVDA's key risks are a slowdown in the company's growth in the subsequent quarters, and a failure to complete the Arm acquisition due to regulatory issues.
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