Startups may be a source of tremendous innovation. But of course, old-line companies can too. Just look at Nvidia Corporation (NASDAQ:NVDA). Launched in 1993, the company’s co-founders — which included tech veterans like Jen-Hsun Huang (now the CEO), Chris Malachowsky and Curtis Priem — saw a great opportunity to develop graphics processing units (GPUs) for the gaming market.
While growth was strong, there was always skepticism. Was the market big enough?
Well, of course, we know that GPUs have proven to be quite versatile, having applications in diverse areas like AI (artificial intelligence), self-driving cars, VR (virtual reality) and the Internet of Things (IoT). The main reason is that this core technology can process huge amounts of data on a cost-effective basis.
And yes, Wall Street has certainly caught on to this. During the past year, NVDA stock is up a sizzling 200%-plus.
But what now? Is it still a good time to buy NVDA stock? Or should investors wait for a better valuation?
Breaking Down NVDA Stock
First of all, there are signs that the momentum is losing some of its steam. For the year so far, the stock is down 5% after back-to-back downgrades in the past week. This is despite the fact that the overall markets have been extremely bullish, with the Nasdaq up about 8.5%.
In fact, since reaching an all-time high in early February, Nvidia stock has since fallen by 14%.
Perhaps the most interesting thing has been the muted response from wall Street from the company’s most recent earnings report. Revenues soared 55% to $2.17 billion and adjusted earnings came to $1.13 per share, up from 94 cents for the same period a year ago. Wall Street, on the other hand, was looking for $2.11 billion in revenues and earnings of 83 cents.
For the most part, there was really nothing to complain about. It was, well, nearly a perfect performance.
Yet NVDA stock fell by about 2.4% on the news.
Then again, it seems that the good news is already baked into the valuation — and then some. Consider that the forward price-to-earnings ratio on NVDA stock is at 30X. By comparison, Facebook Inc (NASDAQ:FB) trades at 20X and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) sports a multiple of 22X. No doubt, the NVDA stock valuation makes other traditional chip operators look almost embarrassing. Keep in mind that Intel Corporation (NASDAQ:INTC) and Qualcomm, Inc. (NASDAQ:QCOM) both trade at about 12X.
Interestingly enough, Wall Street analysts are getting a little antsy about the valuation for NVDA stock as well. Note that the average price target is at $113.59. This implies only a 7% gain from current levels.
For example, Roth Capital Partners analyst Brian Alger downgraded his rating on NVDA stock from “buy” to “neutral” recently. Yes, his biggest concern is the valuation.
Besides, the year-over-year comparisons on revenues and earnings will not get any easier for the company. If there is even a slight miss or sign of deceleration, it seems reasonable that there could be a sell-off. Might as well take profits after NVDA stock has provided substantial gains, right?
Certainly.
Another potential issue is the competition. Let’s face it, rival Advanced Micro Devices, Inc. (NASDAQ:AMD) has been making nice strides with its own graphics systems. As seen with the latest earnings report, the company looks poised for a growth spurt — and this may come at the expense of NVDA. Of course, investors have been buying up AMD stock, which is up around 600% during the past year.
Now, this is in no way to diminish NVDIA’s outstanding technology and the potential growth opportunities. Hey, just with autos, the addressable market could be at least $10 trillion (this is based on recent NVDA investor presentation).
But for now, there probably should be caution. For the most part, NVDA stock is probably due for a cooling-off period. Yet this should be good news, since it may mean that investors who missed the first big move could get a second chance on the stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook and also has his own free iOS app to estimate your tax refund, which is at PathwayTax.com. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
