NVIDIA Corp. (NASDAQ:NVDA) can do no wrong.
If you bought this designer of graphics processing chips in early 2015, you have what is called a “ten-bagger.” The price is up 10-fold since then, opening for trade today at about $197 per share. Back in early 2015, it was a $20 stock.
Everybody loves NVIDIA. A TV host renamed his dog for the stock. The company’s chips and boards are at the heart of all the hottest markets, from artificial intelligence to cloud to self-driving cars and gaming. They’re way ahead in those markets. Analysts keep raising their price targets.
That said, does it really make sense to pay 56 times earnings for a chip stock? The company could do $9 billion in business, maybe, for the year that ends in January. But can it really be worth $117 billion when insiders keep selling?
The Threats to NVDA Stock
The insider “selling” is easy to explain. When stock is part of your compensation package, you sell some of that stock to upgrade your lifestyle. Insiders are selling fewer shares than they did a few years ago. Each share is just worth so much more, it looks like they’re selling more.
What has some NVIDIA bulls thinking of joining the selling is the fact that giant Intel Corp. (NASDAQ:INTC) has finally awoken to the NVDA threat, releasing a chip called Nervana aimed at artificial intelligence by the end of 2017.
Intel has been gearing up for a year, buying AI chip start-ups like Nervana, even talking to Facebook Inc. (NASDAQ:FB) on design issues. Alphabet Inc. (NASDAQ:GOOGL) is also producing its own Tensor processing unit for AI applications in its cloud, which brings up the second potential threat to NVIDIA’s growth.
The cloud czars are now big enough to do things like this on their own. Despite NVDA’s impressive market cap, and its run to glory over the last year, Apple Inc. (NASDAQ:AAPL) could still buy it for cash. Amazon.com Inc. (NASDAQ:AMZN), Facebook or Microsoft Corp. (NASDAQ:MSFT) could quickly ramp up their own design capabilities if NVDA prices appear too dear.
Rational Exuberance for NVIDIA?
NVIDIA is next due to report earnings on November 9, with revenue of $2.36 billion expected, and a “whisper number” of $1.02 per share of earnings, against an official analyst estimate of 94 cents.
In short, analysts are preparing to be amazed. The company’s new Volta architecture seems to keep its lead, even against Nervana, and the company is expecting to get a premium price for the product.
The biggest threat to NVIDIA may be the law of big numbers. Growing from $2 billion to $4 billion is doubling, but it can be done in a year. Can you really grow from $9 billion to $18 billion in sales that quickly? Not in hardware.
To justify a P/E of 56, NVIDIA must increase its net income, which isn’t happening, or its operating cash flow, which is happening. The company is also making continuing progress on its balance sheet, paying off debt that had exceeded 25% of assets last year to ramp up operations.
Still, while NVDA now has more than half of rival Intel’s market cap, it won’t have as much as one-quarter of Intel’s sales this year, and its total asset base is less than Intel’s cash on hand. It’s still stalking a giant.
The Bottom Line
Chip stocks don’t retain P/Es of 56 forever. NVIDIA has yet to grow into its current valuation.
To me that says the stock’s rise is going to slow. It’s the law of numbers. It won’t stop, it will just slow. And when the hyper-bulls realize this, they will dump it.
That will be your opportunity.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, MSFT and FB.
