Nvidia Stock: Over-Pumped - The Selloff May Be Painful

Summary

• Nvidia Corporation has ripped and charted new heights way above the previous November 2021 top, thanks to the Q1 FY2024 double beats and management's stellar forward guidance.
• The demand for AI chips appears to be at a fever pitch, boosting Nvidia Corporation's projected Q2 FY2024 top line by +54% QoQ/ +64% YoY, returning to its previous high-growth cadence.
• However, with the massive optimism baked into its valuations and stock prices, Mr. Market may have temporarily forgotten how painfully the tech bubble popped in 2022.
• For now, it seems that peak irrationality, recessionary fears, and generative AI hype may have unnaturally boosted Nvidia Corporation's prospects in the intermediate term.

DNY59/E+ via Getty Images

The AI Investment Thesis Is Too Volatile At These Heights

NVDA 2Y Stock Price

TradingView

It appears that the market and investors alike have chosen to be somewhat irrational again, pushing NVIDIA Corporation (NASDAQ:NVDA) to its highest-ever stock price of $401.11 at the time of writing.

Either way, the rally is partly attributed to the hype surrounding artificial intelligence, or AI, since the launch of ChatGPT in November 2022, further boosted by the management's stellar FQ1'24 double beats and FQ2'24 forward guidance.

NVDA has guided an eye-popping revenue of $11B (+52.9% QoQ/ +64.1% YoY) for the next quarter, well exceeding the consensus estimates by +54.7%. This is on top of the expanding GAAP gross margins of 68.6% (+4 points QoQ/ +25.1 YoY) and GAAP operating income of approximately $4.83B (+125.7% QoQ/ +867.9% YoY).

These numbers deserve applause indeed, as evidenced by the massive pop in its stock prices. Based on CEO Jensen Huang's commentary here, it seems that the age of CPUs may finally be over, with the insatiable demand for generative AI and computing capacity triggering the redesign of data centers toward GPUs.

NVDA's Head & Shoulder Pattern In 2021/ 2022

TradingView

However, here is where we prefer to exercise caution. This cadence is highly reminiscent of NVDA's previous head and shoulder pattern in November 2021, with it reaching its peak within a short period of time and a plunge occurring after the optimism is moderated.

While we remain optimistic about the AI supercycle, it is uncertain if NVDA's jump in demand is sustainable over the next few years, supporting its stock's new heights at a time of recession. With the stock bordering overvaluation, there may be a minimal margin of safety for adding here, in our view.

Then again, part of the enthusiasm may be attributed to the early recovery in NVDA's other offerings, including the Gaming segment at $2.24B (+22% QoQ/ -38% YoY), Professional Visualization at $295M (+31% QoQ/ -53% YoY), and Automotive at $296M (+1% QoQ/ +114% YoY) for the latest quarter.

We must also highlight that the latter now boasts a design win pipeline of $14B (+27.2% YoY) through 2029, with the world's largest electric vehicle ("EV") maker by volume, BYD Company Limited (OTCPK:BYDDY), set to adopt NVIDIA Drive Orin across its next generational series. With BYD projected to achieve EV sales of up to 10M by 2030, at an accelerated CAGR of 23.40%, we believe NVDA's partnership with the former may trigger a robust automotive tailwind ahead.

Now, back to NVDA's AI strategy, it records an exemplary data center revenue of $4.28B (+18.2% QoQ/ +14.1% YoY), thanks to the growing demand for generative AI. It appears that the latter is also outstripping supply, with the management "significantly increasing supply to meet surging demand" for its entire data center family of products.

It appears that the Jensen-Huang-led company is aggressively eating its competitors' lunch by the latest quarter as well. Both Advanced Micro Devices, Inc. (NASDAQ:AMD) and Intel Corporation (NASDAQ:INTC) reported underwhelming data center performances at revenues of $1.29B (-21.8% QoQ/ inline YoY) and revenues of $3.7B (-39.3% QoQ/ -13.9% YoY), respectively.

Due to this cadence despite the flattish capex spend by many tech/ cloud companies, it may be safe to surmise that NVDA may further grow its market share in the discrete GPU market beyond the latest report of 85% in FQ4'22 (-1 point QoQ/ +7 YoY). This further proves its semi/SaaS dominance and branding in the next semiconductor supercycle.

NVDA 3Y EV/Revenue and P/E Valuations

S&P Capital IQ

However, does this mean that NVDA deserves its valuation? Let's compare it to its peers. The stock has recorded a new optimism in its already premium metrics, at EV/NTM Revenue of 19.79x and NTM P/E of 44.63x at the time of writing, against its 1Y mean of 16.03x and 44.85x, respectively. Notably, the recent peak of 26.03x and 69.72x is already near the stock's previous November 2021 peak of 28x and 72.98x, respectively.

Compared to its peers' valuations, the stock is also expensive, suggesting Mr. Market's growing confidence in its forward execution/ high-growth cadence, despite the economic downturn.

In addition, the consensus estimates have already raised their NVDA estimates tremendously, to a top and bottom-line CAGR of 32.2% and 54.1% through FY2026 (CY2025), against the previous estimates of 20.6% and 54.9% respectively. These numbers are also notably accelerated against the hyper-pandemic cadence of 35.2% and 15.5% between FY2020 (CY2019) and FY2023 (CY2022).

Assuming that the Jensen Huang-led company is able to match the analysts' lofty expectations over the next two years, we suppose the baked-in premium may be well worth it, supporting its accelerated computing and generative AI narrative.

On the one hand, we may safely assume a nearly doubled EPS to $1.80 in FQ2'24 and H2'24, due to the tremendous expansion in its operating income, with NVDA potentially generating a stellar adj EPS of $6.49 in FY2024 (+94.3% YoY), as highlighted by Colette Kress, the CFO of NVDA:

So when we talk about our sequential growth that we're expecting between Q1 and Q2, our generative AI large language models are driving the surge in demand, and it's broad-based across both our consumer Internet companies, our CSPs, our enterprises, and our AI start-ups... This demand has extended our data center visibility out a few quarters and we have procured substantially higher supply for the second half of the year. (Seeking Alpha)

On the other hand, immense expectations may also trigger immense disappointments if NVDA fails to deliver against the consensus' heightened estimates, potentially triggering another flight to safety sell-off moving forward.

With a replacement cycle of every three years, we suppose the sudden boom in demand for generative AI and HPC chips may also be moderated rapidly to its historical trend, one that we have observed after the massive pull-forward demand for personal devices/ PCs during the remote work cadence in 2020 and 2021.

As a result of the minimal upside potential to our price target of $389, based on our aggressive FY2024 EPS projection and a normalized P/E of 60x, we prefer to rate the NVDA stock as a Hold for long-term investors.

We do not recommend anyone to chase the Nvidia Corporation rally here, since doing so naturally increases their dollar cost averages. Meanwhile, we have also taken some gains off the table to rebalance our portfolio here, since it is too early to tell if NVDA may sustain this momentum in the AI chips market.

Many other competitors such as Microsoft Corporation (MSFT), Google (GOOG, GOOGL), Amazon (AMZN), and Intel are already entering the intense AI chips competition, as highlighted in our previous AMD article here. Therefore, any market share losses may trigger further volatility in Nvidia Corporation's stock prices, in our view.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of NVDA, AMD, GOOG, AMZN, MSFT, INTC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The analysis is provided exclusively for informational purposes and should not be considered professional investment advice. Before investing, please conduct personal in-depth research and utmost due diligence, as there are many risks associated with the trade, including capital loss.

Comments

[Kaysch]

I will continue to pound the table that: NVDA is trading at a bargain under $400 level, and that this current: “gift horse buying opportunity trading range won’t last for long”.
— I just hope that it holds at its current trading range through next Wednesday, when my 401K DCA uploads.
*** Go long NVDA, and; you’ll prosper in future abundance with one of the great growth businesses of our time!!!

[mschratter]

Exactly.

Just to be clear, I am in complete agreement that Nvidia is a great company selling a product that is in high demand. That said, fundamentals matter and herd emotionality often takes a stock price far ahead of itself.

All stocks fall back to rational prices. As in 100% of the time. There is literally no example otherwise in all of history. And this is why there is a flood of insiders selling the stock at these prices.

[RockyCT]

@mschratter Amazon has not come down to earth. It is still selling at crazy prices and I still here that profits are coming down the road. But, overall I agree with you. We don't know how explosive and large the market for AI chips and SaaS related technology is. Most likely in the trillions. I think it is the last frontier. What comes after full automation? The end?

[RUBYRUBY3]

@mschratter
NVDA insiders are selling stock options that are generated because the stock went up.
They normally take the cash and then distribute it over other stocks.
Not fear based at all just good investment management.
NVDA bottom of page
finviz.com/...
Check the buy price attached to the sale and number awarded to number sold some are small
TENCH 100K shares $38 million but with 3.3 million still owned.

[mschratter]

@RockyCT

99.99% of new bubbles and technologies do not become Amazon.

[SmallCap55]

A near $1T company on just $40B in sales is definitely "baked in". This is why we have business schools to teach ppl how to invest.

[Up and Away]

Sell off no, trimming yes. Foolish people sell thinking they can time the market

[Yolo 2]

When NVDA was a small company it was reasonable to purchase it with the hope that it would grow its numbers to justify high PE. It doesnt seem mathematically possible for the stock to grow enough to justify even half of its value now. Its what I leared in my Econ class in college, that large companies can not grow much or at all when they get really big, they just pay dividends. NVDA is priced way past that point now in my opinion, and when analysts stop hyping the stock and the AI hype in general fades, the stock will likely drop considerably, or more like a rock.

[Hudson Investments]

@Yolo 2 Like a rock, pretty soon.

[cpraderas]

@Yolo 2 I heard that argument for over 10 years or so with Apple when it was ~$500B or less. Breaking $1T was like breaking the sound barrier for the first time. The internet has changed everything. Now we have plenty of companies that can scale to over $1T.

[TripLiars]

@Yolo 2 dream on! All you can say is NVDA is out of your reach and you would sit on sideline until you can buy it at a lower price after splits.

[Batman163]

NVDA will be able to raise the price of its chip/software combo's and business will pay it.

[7983571]

They can only raise it to a certain extent. After which, the likes of Apple will build their own. The moat is a technological one which is not as strong as a network moat. It’s got an advantage like Tesla but over time, that gap becomes smaller. At one trillion, growth is much less than when it was 100 billion, law of gigantic numbers.

[Juxtaposed Ideas]

@7983571 Agreed

[Jlagreen]

@7983571
Apple and others will have to decide if they pay more to Nvidia or if they invest lots of money into researching a field new to them. Data center acceleration and interfacing is a completely different field from creating a chip for mobile devices or ASICs for specific tasks.

[AnimeSnoopy]

Ahh young love...

This whole thing kinds reminds me of my first girlfriend, in high school.
High-school me would have figured we'd be married with 3 kids by now.
Thank god that didn't happen lol.

Kids wanna wife up $NVDA on forward valuations 3-4 years from now (under ideal conditions).
Well, don't say I didn't warn you...
The AI industry is young...

You might find yourself eye-ing up some pretty attractive opportunities in the space between now and 2026...
My advice: don't tie yourself down...

Personally, I'm been short young love... Maybe that makes me heartless or a pessimist or something...
But when I see kids in high school "in love"... Well if you offered me a wager on whether it'll last, easy I'd go short on that every day.

So, I'm short $NVIDA at $408

[Juxtaposed Ideas]

@AnimeSnoopy Interesting points!

[Hudson Investments]

@AnimeSnoopy The big NVDa PLUNGE so oh what an opportunity to buy the dip today, Monday when Nvda retreats off its highs. They’re talking head and shoulders pattern bullish to bearish plunge.

[RUBYRUBY3]

@AnimeSnoopy
Married and first kid at 19, 48 years now.
Beat the odds.

[Up and Away]

Well written article but unfortunately I disagree with the fact that this stock cannot go higher. Sure it is already rocketed up but it is just the beginning. All the other companies still have to catch up to generative AI and many will be trying to do so but not fast enough giving NVDA even more space in my view.

[Juxtaposed Ideas]

@Up and Away Agree that it may go even higher for the long-term, but we may realistically see $350 in between, or maybe even lower at $320. We'll add again at those levels. Either way, thank you for the kind words.

[Hudson Investments]

@Up and Away You must be dreaming NVDA but thinking INTC.

[pmapires]

My list of best AI stocks to grab on the coming "hype" sell off. Wait for Chanos to short em then buy em on the the big dip.
- Hardware: Nvidia, Qualcomm, Micron, Seagate, Applied Materials, AMD, Intel, Dell.
- Software: Palantir, Splunk, Alphabet, Meta, IBM, Amazon, Microsoft, Tesla.

[mschratter]

@pmapires just buy the sector in an ETF.

[DMS348]

A rational take from another guy that missed it. Doh!

We're in the first inning of AI. This could be more like 1994 than 1999 if you want to compare it to the dot com era.

Own Nvidia. Do not trade it. They OWN the space like no other. Possibly more dominant than Intel during the 80s PC wars. They sell to everyone. Do not ever expect this stock to get cheap, or even reasonable.

[Jlagreen]

@DMS348
Cisco became a 50 bagger von 1994 to 1999. Despite the collaps it remained a 10 bagger afterwards.

So we might see Nvidia at 50T???

I think I would sell then as my position would become a high 8 digit figure lol.

[AjitMD]

@DMS348 Hard to estimate the profits that AI will make for comoanies like Msft, Google and others. However, these companies just started the surge in spending on AI. Plus new semis. Wait times are 12+ months. Nvda will correct but not collapse. Too many investors want to buy the stock.

[RUBYRUBY3]

@Jlagreen
NVDA
stockcharts.com/...

Needs to walk sideways for a time to build a new base.
3 months to see if Earnings are really there, it would lift off if they are or are beat. Hitting 40% and missing 50 will drop it like a rock.
Risk/Reward the same old game.

NVDA needs time for support lines to catch up.
bigcharts.marketwatch.com/...

[easyxpress]

Seriously, for the past two decades, NVDA was considered overvalued fundamentally at any given price or time. And yet, NVDA had appreciated 100x+ since 2014. Why？Why were people keep using the same and wrong fundamental analysis on NVDA over and over again? Why are generation and generation of professionals not learning the mistakes? I just don't understand. I don't. This article will not age well just like these countless articles before it. I don't have the crystal ball to know what the price will be, but I know NVDA will continue to be volatile but do well in the future, so buy and hold. -- from a looong term decades long NVDA stockholder.

[Just Some Guy]

@easyxpress because they've been incredibly lucky and that's hard to see coming! They had their nice little graphics and gaming niche but then ... crypto! And just about when crypto started getting off GPUs ... AI! And just when the AI / data mining thing died out - autonomous cars! And just when everyone was giving up on those ... GPT! Doh!

To be fair Intel has also been very lucky but just once, the cloud came along circa 2017 and saved their bacon or they'd be in even worse shape than they are today.

[Bob Kleinberg]

Luck has little to do with Nvidia's success.

[Maverick 2021]

AI is bulletproof technology against a bear market correction….$$$$$$

No Bubble won’t go unpunished to investors, as the AI hype is just getting started….$5T on a he sideline can keep fueling the mania for months or years……$$$$

Wall Street smells the money, as PE multiplies have been stretched and the rally continued beyond reasonable…..$$$$$ imho ???

More gains ahead, AI rally potential is unlimited……00

[SilverD19]

@Maverick 2021
$5T on the sidelines? What do you do, pull numbers out of the air? Even if that was accurate, they're smart enough to know stocks don't go parabolic for long, and at least half of the gap up will be filled. The smart money knows there's a much better entry into NVDA in the $340 range.

[Hudson Investments]

@Maverick 2021 Funny, I see AI much differently than you believe. I believe is simple the next bubble that investors are convincing themselves is the second coming. It will have legs only if it puts money into the coffers of the hardware and software companies like NVDA, MSFT, AAPL within a year from today.
NVDA is subject to all the macro economic issues that every equity is effected by.
I especially believe that the raising of the debt ceiling was only step one. The USA was not expected to default. Step two is the liquidity problem that banks and equity stocks have. The Fed will attempt to issue new treasury notes and bonds next week and it will be interesting how successful these new issues will be.
Step 3 is the measure of inflation and the interest decision by the Fed at their next meeting in July.

[Cdoctator]

I watched Jensen huang’s new presentation. It’s mind blowing. I cannot bet against him and nvidia. As a matter of fact, I think nvidia is changing the world in the revolutionary way…I’ll hold my position on nvda for the next 5 years and buy every pull backs along the way.

[Juxtaposed Ideas]

@Cdoctator Agree on the pullback.

[daz15]

The investment 'professionals' (of which, 90% can't even beat the S&P) who pumped up NVDA this past month , are the same people who were selling META in the $100's, and got it down to $81, along with GOOG. It's the sell low, buy high crowd. CNBC's flavor of the month is 'Ai, it's the future, bro!' But 3 months ago it was 'Tech stocks are a sell, because 'muh interest rates' . Two years ago, it was the 'reopening plays'. I remember watching CNBC and they were saying buy DIS at $160 because 'reopening plays, are the future bro!' Great two year return on that one.

[wboz]

@daz15 dis was, in fact, a great reopening play. But like any latest flavor of the month, it wasn't a very good investment ... after that.

[Juxtaposed Ideas]

@daz15 You may want to refer to my historical buy rating for META & NVDA for reference.

[productivityLeaps]

I wonder, don't you, what the current growth rate is for the not-so-little, let's call it an intermediate sized green shoot of the $200mm in SaaS sales NVDA posted? I mean, we can be confident it grew at ~100% in ~8 months given what Colette told us two earnings calls ago then at a recent investor conference. At the earnings call I'm referencing, I'm pretty sure it was an earnings call although it could have been an investor conference shortly after that earnings call, she told us $100mm had been the TTM for SaaS sales. Then, we learned it 2x that maybe six months later. Regardless those specifics, suffice to say it 2x in well under one year.

So, maybe the @juxtaposed ideas will get out his/her virtual calculator and spitball that for his/her readers. I'd say it has been clear for some time that these architectures, Ampere, Hopper, will provide a longer GPGPU transition cycle because there's so much software digestion required and NVDA planned for years now to transform itself this way. Don't ya think? And wouldn't that be pottant to anticipate towards valuation?

[Juxtaposed Ideas]

@productivityLeaps Agreed, though these are mostly baked in already, in my view. We may differ in opinions and that is the beauty of it, isn't it?

[Murad Shawar]

@Juxtaposed Ideas NVDA overvalued by half just my opinion .

[productivityLeaps]

@Juxtaposed Ideas Well, I'll suggest here it is very difficult to know whether the SaaS which Colette indicated grew at least 100% in ~8 months, are "baked in". That's because no one, not even those leading NVDA, know just how significant those sales will be. Seems likely to me they cannot be fully baked in for that reason. After all, very likely many of the SaaS sales are recurring in perpetuity given the iterative nature of LLMs, SaaS, and the rate of change in technology today. I

t's the subscription model which Gillette made famous some years ago and which works well in SaaS. It is probably the smartest business model I've seen depending on the product, of course.

[Sleepless@FED]

Technology ETFs :

ticker - week of 6/2/23 - YTD returns

XLK - 4.16% - 34.12% (overall tech)

IGV - 4.49% - 29.05% (software)
SMH - 4.04% - 44.02% (semis)
FDN - 6.61% - 29.61% (e-comm)
IPAY - 2.99% - 6.21% (fintech)
WCLD - 7.66% - 22.69% (cloud)

[doc47]

@Sleepless@FED XLK almost 50% with only AAPL, MSFT. NVDA a distant 3rd at about 4.5. XLK has just about doubled in the last year, which is very hard for any ETF to pull off.

[Sleepless@FED]

@doc47
indeed and XLK has quietly outperformed QQQ - it returned 30% more over the last 5 yrs

[Just Some Guy]

There are a powerful lot of NVDA put options out there!!!

[longnose]

This is patterns match talk. The interest rate cycle, inflation picture and of course AI use case is very different than year ago. Facts changed thus price changed. No one else offers chips like nvda for consumption. Goog for internal use. I think nvda may have far entrenched advantage now than just year ago. Even Mlnx switches will be very important

[Clauser1960]

When you are up 300 % or 400%, you just don t care

[mschratter]

@Clauser1960 What? haha

[Clauser1960]

@mschratter I am up 600% , let's see who LOLs more

[mschratter]

@Clauser1960 haha

Stop being so childish.

[notre]

Shorting this stock could be extremely costly especially when everyone is betting against it.
This is where shorts loose their shirts.

[mschratter]

@notre Or that's where the real money is made.