Nvidia Corporation (NASDAQ:NVDA) stock has made a lot of bearish analysts look foolish over the past few years. NVDA stock has nearly tripled over the past year, risen 825% over the past three years and gained by a factor over 12 over the past half-decade. All the while, analysts and investors have screamed “Stop! This time, Nvidia has run too far!”
At the risk of being one of those incorrect doomsayers, I do think Nvidia stock looks a bit stretched at this point.
A 12x revenue valuation is nearly unprecedented in the chip space. To be fair, Intel Corporation (NASDAQ:INTC) paid an estimated 40 times revenue to acquire Mobileye NV (NYSE:MBLY). But it’s important to remember that only 7% of Nvidia’s first-quarter revenues came from automotive.
Again, NVDA stock has made fools of a lot of bears. But there are some risks worth watching as Nvidia heads into earnings after Thursday’s closing bell.
Competition Is on the Way
Even though bullish commentary on NVDA stock often focuses on automotive, AI and datacenter applications, Nvidia at its heart remains a gaming company. More than half of first-quarter sales, and 59% of 2016 revenue, came from gaming.
In that space, Advanced Micro Devices, Inc. (NASDAQ:AMD) is making a push with its new Vega line. And AMD is arguing that its performance is equal to, if not better than, that of Nvidia’s legacy GTX 1080 card. Expecting Advanced Micro to take over dominance in GPUs obviously is too optimistic. But even modest success can erode some of Nvidia’s long-held dominance in the space — and bring down both revenue and margin growth.
Beyond gaming, Nvidia simply doesn’t have the same head start.
It’s Intel that’s dominant in data center, with Nvidia and AMD trying to take share. The automotive end market will be an absolute street fight. Nvidia did recently announce an agreement with Toyota Motor Corp (ADR) (NYSE:TM), a solid first step. But everyone from Tesla Inc (NASDAQ:TSLA) to Alphabet Inc (NASDAQ:GOOGL) to Intel/Mobileye and other private upstarts will have their say as well.
Nvidia earnings still are going to grow. But the amount of growth being priced into NVDA stock projects its dominance in gaming will be repeated elsewhere. That’s far from guaranteed.
Will End Markets Hurt Nvidia Stock?
The question beyond competition is just how much growth Nvidia’s end markets will drive — even if the company establishes market-leading share.
Datacenter growth looks exponential at the moment, but that will slow at some point. The enthusiasm toward autonomous driving is looking a little excessive as well. And high-end PC gaming likely has benefited from the console cycle. Next-generation systems from Sony Corp (ADR) (NYSE:SNE) — from whom Nvidia walked away for the PlayStation 4 — and Microsoft Corporation (NASDAQ:MSFT) could dent demand for Nvidia’s Shield and PC chips.
Again, it’s not as if Nvidia’s growth is going to come to a screeching halt. The PC and console gaming markets are very different. Datacenter growth will continue. And self-driving cars are coming — at some point.
But the concern relative to Nvidia stock has to be just how much growth is priced in.
NVDA Stock Is Awfully Expensive
Nvidia stock is trading at over 50 times 2018 earnings — even with analysts expecting a deceleration of growth the following year, to about 13% year-over-year.
It’s possible that Nvidia Corporation will grow into that valuation. The Toyota deal alone should add as much as 65 cents in annual EPS, according to one analyst. Operating leverage can turn 10% revenue growth in 30-40% gains in earnings. It’s not at all unrealistic to project the chipmaker earning as much as $10 per share at some point next decade.
But even that figure looks close to priced in — Nvidia stock trades at over $160 per share. And in the near-term, it’s important to remember that just a few months ago, NVDA was rattled by a notable, and sharp, change in sentiment.
$160-plus may be a good price to pay. Most prices have been, particularly over the past few years. But there are risks here, and investors would be wise to keep those risks in mind.
No stock is bulletproof — even if NVDA stock has been awful close of late.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.