Throughout much of this year, I’ve been a fan of Nvidia Corporation (NASDAQ:NVDA). I love the financials, the management team and its execution. The company is a well-oiled machine; hence, the dramatic surge in NVDA stock. Even after it hit a series of ridiculous price points, Nvidia continued to defy both gravity and bearish traders. But with shares recently hitting all-time highs, are investors better served elsewhere?
Among InvestorPlace analysts, the consensus is becoming more of an open-ended question. Up until late July, my colleagues expressed admiration for Nividia management, and its simultaneous ability to lead in core businesses and push key innovations.
But I noticed the tone changed after NVDA stock conquered the $160 level, and then almost breached $170. At such a price tag, the valuation is too high.
I understand the apprehension toward NVDA stock. Although impressive second-quarter results for Advanced Micro Devices, Inc. (NASDAQ:AMD) implied a robust semiconductor market, it’s still hard to justify NVDA shares at a price-earnings ratio of 55. As InvestorPlace contributor Bret Kenwell points out, Nvidia’s P/S ratio of 13 far exceeds the 3X multiple of Intel Corporation (NASDAQ:INTC) and AMD.
Although it’s difficult to prove, I think most people avoid Nvidia simply because of perceived overvaluation. Our own Dana Blankenhorn summed up this sentiment nicely when he wrote:
“I am perfectly willing to buy NVDA stock, and recommend it, at a reasonable valuation … Just not 54 times earnings. Overpay for anything and you’re looking for trouble.”
Indeed, nobody deliberately searches for trouble. Buying Nvidia stock when all the positive news has been baked in appears ridiculous. But is it really such a bad gamble?
NVDA Stock Has a Perception Problem
My colleagues are probably rolling their eyes at me for asking such a question. Nevertheless, I believe it’s a fair one. For all the bearish or cautious articles, none of them to my knowledge outright hate the company. Instead, it’s a matter of perceived value, and an estimation of market patience.
InvestorPlace’s Vince Martin proves my point. He acknowledges the tremendous fireball that is NVDA stock while citing various fundamental strengths. So, too, does Kenwell. Both these gentlemen are not at all eager about shorting Nvidia. Kenwell was spot-on when he wrote, “I would be a dip buyer rather than a rip seller.”
Whether you like Nvidia stock at current levels, no one is badmouthing the business or the growth. Instead, people are concerned that NVDA is stretched too thin.
But isn’t the reason for its sky-high valuation because unconvinced analysts refuse to criticize its fundamentals? In other words, when I read my colleagues’ publications, I actually see the justification for the supposedly ridiculous P/E.
Blankenhorn writes:
“NVDA is in the sweet spot of the market. Its GeForce graphics line is not just where you want to be for gaming, but for autonomous driving and artificial intelligence as well. Graphics chips are transforming the cloud, augmenting the low-cost silicon muscle they now contain with fast twitch muscle to deliver instantaneous calculation. In every hot area of silicon, NVIDIA is a leading player.”
If Nvidia had a critical vulnerability, if its products weren’t attracting new customers, if it had uncontrollable debt, I’d understand. But I’ve yet to come across a recent story articulating any overwhelming weakness in the company. Again, the discussion centers on price and what investors are likely to pay.
Nvidia Trades at a Premium for a Reason
As you may have guessed, I’m not terribly concerned with the P/E ratio. While it’s admittedly higher than the competition, that argument must also be balanced with context. For example, I see no shortage of bullish articles for AMD, yet it trades for a forward P/E ratio of nearly 180. AMD’s financials are also garbage compared to Nvidia’s.
And I completely agree with the concept that price matters. But at some point, positive earnings also matter. In addition, having a clean (or “clean-ish”) balance sheet goes a long way toward sparking long-term growth. I’d much rather buy a great company with a high valuation, than a middling organization with a low valuation.
Ultimately, I look at NVDA stock in non-financial terms. When you read automotive publications, they almost always provide high marks for performance among exotic sports cars, but low marks for affordability. But isn’t this how it’s supposed to be?
Let’s just be real — I would love more than anything to have a Lamborghini Aventador in my garage. I’m pretty sure, though, that I’ll get laughed out of the Lambo dealership if I tried to get a “fair deal.” I’m going to get ripped off because that’s the name of the game. But I’m not sure if criticizing Lamborghini, or Nvidia in this case, for simply outperforming others is entirely fair.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
