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Nvidia’s $100 Billion Market Cap May Be Too High

Nvidia stock is priced for perfection -- but perfection may not last

By Vince Martin, InvestorPlace Contributor

Nvidia Corporation (NASDAQ:NVDA)  has given plenty of investors the opportunity to look like a fool. Nvidia stock has been one of the best plays in the market for years now. NVDA shares are up 60% just since early May, up nearly 200 percent in the past 52 weeks, and have risen 750% in the last three years.

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As I’ve written before, there have been naysayers questioning NVDA’s stock price the entire time. Still, as the market cap of Nvidia stock hovers around $100 billion, I can’t help but wonder if the stock finally might have gone a bit too far. NVDA stock is dearly priced, trading at some 40x fiscal 2019 EPS estimates plus cash. So far, it’s driven enough growth to maintain that multiple. But there has been some one-time help. More importantly, competition is going to get more intense going forward.

I have little interest in shorting NVDA stock — betting against the stock, and the company, has been a fool’s errand so far. I thought Q1 earnings in May were fantastic and supported a much higher price for NVDA.

But we’ve gotten that price – and then some. Nvidia stock has added over $35 billion in market capitalization just since that report. And I still question whether that might not be a bit too much.

Nvidia Stock Is In The Sweet Spot…

A quick look at Nvidia stock shows that pretty much everything is going right for the company at the moment. But that also extends to factors beyond the Nvidia’s control.

For one, all of tech is going rather well. NVDA stock looks far less like an outlier in an environment where mega-cap stocks like Apple Inc. (NASDAQ:AAPL) and, Inc. (NASDAQ:AMZN) have gained 40%+ and 27%+ year-to-date, respectively.

Closer to home, cryptocurrency mining provided a $150 million boost to revenue in the second quarter alone. As InvestorPlace contributor Luke Lango pointed out, that’s what drove the second quarter earnings beat. Revenue in the key growth areas of datacenter and automotive both came in lower than analyst expectations. But the benefit of Ethereum and bitcoin mining is starting to fade already, and won’t help Q3 earnings nearly as much. And investors expecting another in a long line of Nvidia earnings beats may be disappointed if mining help fades and growth elsewhere again disappoints.

In the core gaming business, meanwhile, the ‘console cycle’ driven by the Sony Corp (ADR) (NYSE:SNE) PlayStation and the Microsoft Corporation (NASDAQ:MSFT) XBox appears to be over. The days of big jumps in performance and graphics capabilities with each new console are done. That likely has given a recent boost to Nvidia GPU demand, which still drives the bulk of the company’s revenue.

Again, this isn’t to say that Nvidia revenue and profits are about to fall off a cliff. But recent growth might be exaggerated by factors outside the company’s control. And with investors starting to price in that level of growth going forward, a slowdown could bring NVDA stock down from the highs.

…And Competition Could Be An Issue

Meanwhile, competition is only going to increase going forward. Nvidia clearly has a chance to take market share from Intel Corporation (NASDAQ:INTC), which appears late in responding to the threat to its dominance in server chips. But Advanced Micro Devices, Inc. (NASDAQ:AMD) may make itself known in that space as well, and Intel is developing next-generation products to counter the challenge.

AMD is a relatively new competitor in GPU, and our Chris Lau has argued convincingly that Nvidia investors are underestimating that threat. AMD has benefited from cryptocurrency itself – taking some of Nvidia’s market share in the process – and its Vega line is potentially competitive with Nvidia’s high-end GTX cards.

Here, too, it’s not as if Nvidia is simply going to roll over and give up market share. But a resurgent AMD could limit Nvidia’s sales – and, just as importantly, pressure it on pricing. Given that Nvidia’s gross margins are huge by semiconductor standards – over 59% on a trailing 12-month basis – Nvidia may have to give up some of those margins if AMD releases a worthy rival. That alone could limit Nvidia’s earnings growth. And that, too, could change the sentiment surrounding Nvidia stock.

NVDA Stock Might Be Too Expensive

It simply looks like the risk/reward profile of NVDA stock might be skewed to the downside at this point. Obviously, there’s still a fantastic bull case here, and growth opportunities still extend for several years.

But we’ve seen Nvidia stock get rattled before – as recently as earlier this year – and there’s reason to think another shock might hit the stock relatively soon. Nvidia is priced as if everything is going right – and will go right. The former seems true. The latter might not be.

As of this writing, Vince Martin has no positions in any securities mentioned.

Article printed from InvestorPlace Media,

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