For Nvidia Corporation (NASDAQ:NVDA), 2016 was as good a year as it was for the Atlanta Falcons. But we know how the Falcons’ story ended.
Is NVDA stock about to undergo a similar fourth-quarter collapse?
Going into the Feb. 9 earnings report, analysts are wary, with just half saying buy and most of the rest saying hold — which is something they say when they don’t know what to say.
Earnings are expected to be just a little better than the previous quarter, net income of something over $550 million, 87 cents per share, on revenues of $2.11 billion, just a little more than last quarter’s $2 billion.
If Nvidia meets those expectations, however, or even exceeds them only by a little bit, I expect NVDA stock to fall. Here is why.
An Overpriced Stock
NVDA is, to the surprise of no one, incredibly overpriced right now. At the opening bid of $119 per share on Feb. 8, Nvidia stock is trading for 44 times next year’s earnings estimates. Its market cap, almost $65 billion, is 13 times its fiscal 2016 revenue, and nearly 9 times its anticipated 2017 revenue.
Meeting analysts’ targets this quarter will show that its incredible October performance was not a fluke, where revenues rose 60% over the previous quarter and profits doubled.
My call is not based on Nvidia having done anything wrong.
In fact, it is doing an enormous amount right. Its graphics chips are finding new markets in cloud data centers and in cars. Its original niche in gaming is the only thing happening in the PC space. Huge new markets in augmented and virtual reality are beckoning. Along with Qualcomm, Inc. (NASDAQ:QCOM), Nvidia is ending the age of Intel Corporation (NASDAQ:INTC) general purpose microprocessors, replacing it with an era of specialization.
The problem is, as our Tim Biggan has observed, that NVDA stock is currently priced for perfection, and perfection is in the eye of the beholder. Any misstep, even an imagined one, can hit a stock hard when it’s up 280% in a year.
Lots of things could happen. Analysts could decide that meeting expectations is not good enough. They could find a shinier object somewhere else in the market. They could start getting jumpy over a possible trade war, one that has already started with curbs on visas.
Or, perhaps, Nvidia could get into a spat over licensing of intellectual property, a hot topic wherever silicon chips are made and sold.
It’s possible.
Who Missed the Boat on NVDA Stock?
Of course, there is always the chance that this is wishful thinking, as often occurs with hot stocks.
Investors and analysts who missed the boat on a stock will talk it down, in hopes that it will drop and they can get on board. This has happened many times with such stocks as Amazon.com, Inc. (NASDAQ:AMZN) and Apple Inc. (NASDAQ:AAPL). No tree grows to the sky.
For these investors, a fall in Nvidia stock of 15%, to a market cap of about $50 billion — worth 7 times 2017 revenue — would seem more reasonable.
What happens in these cases is that a stock will start to fall, and investors will immediately buy it back to its original, overvalued position. Nvidia does make some very hot hardware, it is continually pushing the performance envelope, and it has strong positions in all the fastest-growing markets of our time.
This is one of the differences between investing and trading that investors need to understand. Traders want a hot stock to go down, but that desire, or that fact, does not mean a hot company has grown cold.
It means that a lot of people who missed a good deal still want it.
NVDA stock may indeed fall after earnings Thursday evening, in other words. But if it does, a lot of investors will be waiting to pick it up and consider it a bargain.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he was long AAPL, AMZN and INTC.
