Sell Nvidia Corporation Stock at $204 to Lock in Profits

Advertisement

Nvidia Corporation (NASDAQ:NVDA) continues its red-hot performance. NVDA stock is one of the biggest winners on the Nasdaq for 2017. Shares are up 171% over the past year, and 83% 2017 year-to-date alone. Anyone skeptical of NVDA stock, including this author on occasion, has looked rather foolish.

NVDA stock

Source: Shutterstock

However, stock price isn’t always tied to business performance. In the case of NVDA stock, investors have bid it up far in excess of any reasonable valuation given the current balance of risk and reward.

For NVDA stock to continue producing sizzling returns, just about everything has to go right for the company. The phrase “priced for perfection” was invented for situations like the one we see with Nvidia today.

Yes, Nvidia’s Business Has Been Booming

The story with NVDA stock starts at its frenetic earnings growth in recent quarters. Bulls can point to NVDA earnings with pride, it’s been one of the best stories of the year so far.

The company has grown earnings by a rather astounding 137% over the past year. For the first half of 2017, compared to 2016, revenue climbed 53%, free cash flow generation by 17%, and net income by 125%.

Those are amazing numbers, though net income and earnings are clearly running ahead of actual sales and cash flow, powered by improving margins and mix.

All five of Nvidia’s product categories showed year-over-year growth. Only professional visualization came in under 10% growth; the other four segments all grew by at least 20%.

Assuming full-year 2017 estimates are achieved, auto revenues will be up almost 5x since 2014, data center up 4x, and gaming up almost 3x. That’s some pretty heady stuff.

Future Growth Will Be (Much) Slower

Unfortunately, Nvidia’s growth rate is set for a serious slowdown. Analyst consensus has earnings rising from 3.49 over the past 12 months to just 4.02 next year. The company is heading for less than 20% growth next year, and analysts peg the five-year compounded growth rate going forward at just 13%. That’d put earnings in 2022 around seven bucks a share, which is nowhere near enough to justify a $200 stock price today.

Sure, you can say, analysts are probably sandbagging. Nvidia tends to beat guidance when reporting quarterly results. But even assuming they beat guidance comfortably, it’s still hard to justify anything close to the current price.

Given the relatively slow rate of EPS growth for the current year, the P/E ratio will barely budge. NVDA stock is at 56x PE now and is expected to fall to just 49x in 2018. Why is earnings growth slowing down so dramatically?

Here’s some real NVDA news that many folks tend to gloss over. It’s worth remembering that Nvidia generates close to 70% of its revenues from gaming and professional visualization.

The gaming division has benefited from the launch of a bunch of new cards. That pulled forward demand, but don’t expect that sales momentum to continue let alone accelerate. And Advanced Micro Devices, Inc. (NASDAQ:AMD) will almost certainly hit back with new graphics cards launches of their own to try to take back share from Nvidia.

Nvidia has also profited from card sales due to the boom in Bitcoin, Ethereum and other such cryptocurrencies. However, logic dictates these markets will slow down sooner or later.

Already, as part of AMD’s earnings miss recently, they conceded that mining card demand is “leveling off.” That as cryptocoins continue to soar. What happens to this source of demand once Bitcoin prices stall out, let alone correct sharply?

The Sexy Growth Drivers Are Too Small to Matter Yet

Yes, Nvidia has huge growth in some areas such as autos and data center. But with gaming and professional visualization at 70% of the business, the other stuff that excites investors more make up just 30% of revenues.

Take auto, for example. Nvidia has high hopes for this division. They see cars as gigantic supercomputers on wheels in the future. Each vehicle could potentially produce thousands of GBs of data a year, and the processing power needed to sort through all that will be immense.

However, that’s still quite awhile into the future. As of today, auto revenues grew at a healthy 22% clip for the first half of the year, but still make up just 7% of the company’s revenues. For full-year 2017, analysts expect Nvidia to generate around $500 million in auto revenues. NVDA stock, you should recall, has a $118 billion market cap. Buying Nvidia stock for auto revenues today is dangerous, the division is hardly even a rounding error at this point.

Sure, auto could one day become the main profit for Nvidia. But will it? Plenty of other competitors, including very well-funded competitors including Intel Corporation (NASDAQ:INTC) and Alphabet Inc (NASDAQ:GOOGL) have other plans. Even Texas Instruments Incorporated (NASDAQ:TXN) generates many multiples of Nvidia’s current auto revenues, and TXN stock sells at just 23x earnings.

NVDA Stock Is Heading For A Correction

NVDA may be reaching a resistance point around the $200 mark. The NASDAQ Composite is blasting off into the stratosphere, but the NVDA stock price today has been a bit slow to follow.

In the bigger picture, two of the biggest drivers of Nvidia’s recent performance are slowing down. Gaming enjoyed an unusually strong period earlier this year and will see its growth rate stagnate. And as competitor AMD showed, demand for cryptomining cards is also going to level off or perhaps even decline in the medium-term.

Yes, Nvidia has some amazing growth areas to target. Auto, data center, AI, it’s all good stuff. But none of it is enough to sustain the company’s torrid growth rate in 2018. With the stock at nearly 50x forward earnings and a jaw-dropping 14x sales, risk is tilted to the downside. Nvidia may eventually conquer these markets, but earnings momentum will taper off in the interim. And competition remains fierce, the rest of the tech world isn’t going to cede these huge new markets to Nvidia without a fight.

At the time of this writing, the author owned INTC stock and TXN stock. He had no positions in any of the other aforementioned securities. You can reach him on Twitter at @irbezek.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/nvda-stock-lock-profits/.

©2024 InvestorPlace Media, LLC