On Wednesday, Advanced Micro Devices, Inc. (NASDAQ:AMD) fell 13.5% despite beating earnings and revenue expectations. The company said revenue will decline sequentially by 12% to 18%. However, management boosted its full-year sales estimates. Still, shares were hammered. Could the same thing happen to NVDA stock when Nvidia Corporation (NASDAQ:NVDA) reports fiscal third-quarter 2018 earnings on Nov. 11?
Plenty of investors have been looking at NVDA stock price today for clues as to what it might do. On Wednesday, it fell 2.5% in sympathy to AMD after previously nearing its 52-week high just under $200 a share. The big question is, what will it do leading to up and after NVDA earnings?
The Trouble With Valuing NVDA
The NVDA news has been good. Business demand remains robust. It’s well positioned in every meaningful tech growth market, including self-driving cars, artificial intelligence (AI), data-centers, cloud-computing, and graphic cards used in gaming and cryptocurrencies.
All of that growth has put an immense valuation on Nvidia, with NVDA stock trading at 48 times forward earnings estimates. It may be forecast to grow 41% this year, but that growth slows to just 10.7% next year (fiscal 2019). Perhaps this forecast is too low. Even if we were to double it to 21%, I would still fold on a stock trading at 48 times earnings.
Facebook Inc (NASDAQ:FB), Alibaba Holding Group Ltd (NYSE:BABA) and Alphabet Inc (NASDAQ:GOOGL) actually have better growth rates and trade at roughly half the premium. So why pay up so much for NVDA, which notably, also trades at 14x sales?
We all know self-driving cars, AI, and cloud storage will be highly relevant in the years to come. We don’t know who will win those wars — be it the battle between Tesla Inc (NASDAQ:TSLA) and General Motors Company (NYSE:GM), or the cloud war between Microsoft Corporation (NASDAQ:MSFT) and Amazon.com, Inc. (NASDAQ:AMZN).
However, we know that no matter which company or companies win, the one constant helping to power it all will be Nvidia. That’s why investors feel comfortable bidding up the stock to unimaginable heights. That’s why shares are up more than 80% in 2017, 170% in the past 12 months and 580% over the past two years.
Does NVDA Deserve It?
Does NVDA stock price today justify its future realities? It does, but it also limits how much upside could be left. Intel Corporation (NASDAQ:INTC) has a market cap of $190 billion. NVDA stock is up to a $116 billion valuation. But despite having 61% of the market cap as INTC, NVDA’s sales are just one-seventh (~14.4%) the size. I definitely like Nvidia. Many have made the case it can go to $250. Longer term, I definitely don’t disagree. We know Nvidia is and will remain a powerhouse, but finding the right risk/reward balance is key.
Nvidia has beat earnings and revenue expectations in eight straight quarters. In 2016, each report led to another explosive rally. So far in 2017 though, those explosions are toning down. Only once did NVDA stock pop big, in May, after months of consolidation and it being slightly lower through five months of the year.
Other than that, we’ve had near-flat reactions in February and August post-earnings. More and more investors have been pricing in good results, bidding the stock up into the report and leaving little upside left when Nvidia reports good results.
Trading NVDA Stock
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That seems to be happening now. NVDA stock is up 12% since its last report and keeps bumping into $200. So will NVDA plunge like AMD after earnings? If it sells off beforehand, I don’t think so. But if it rallies into the event, there could be issues moving higher in the short-term.
I think the best thing that can happen is that AMD’s results weigh on NVDA. Intel will report on Oct. 26. A “so-so” reaction to this overbought name could weigh on Nvidia, too. That might be for the best, though.
If we can get Nvidia down into the $175 to $185 range ahead of its own report, it will leave it with some ability to power higher on good results. For traders, $180 to $190 should act as support. For long-term investors looking to buy though, we have to wait. A market-wide pullback will eventually come to fruition. We’ve now had the longest streak ever in the S&P 500 without a 3% pullback.
Eventually it will come and high-octane stocks like NVDA will get hit. Pounce when that happens.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, he was long BABA.
