The tables have suddenly turned on red-hot tech names.
Over the past year, tech giants such as Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX), Alphabet Inc (NASDAQ:GOOG,NASDAQ:GOOGL), and Nvidia Corporation (NASDAQ:NVDA) have seen their stocks do nothing but steadily rise.
But recently, there has been a notable shift from red-hot, richly-valued tech names to beaten-up, low-valued retail names. Last week, the aforementioned tech names slid between 2% and 6%, while Macy’s Inc (NYSE:M) was up about 15% and Nordstrom, Inc. (NYSE:JWN) was up more than 10%.
Does this signal some massive shift in the markets away from tech? I doubt it. The growth stories across the board are simply too strong to keep investor demand depressed for long. I say buy the dip in FB, AMZN, NFLX, and GOOG.
But what about NVDA stock?
I say buy the dip, too, but also exercise caution. There are more warning signs here than with other big tech names.
Elevated Risks to NVDA Stock
I’ve been bullish on NVDA stock for some time, but cracks are starting to form in the bull thesis. Namely, there are two risks which I’m nervous about.
Most of the components of the underlying NVDA growth story look like they have many years of big growth ahead. But there is also the whole cryptocurrency mining aspect, which has a significantly hazier growth outlook than the data center business. Cryptocurrency mining doesn’t account for a big portion of NVDA’s business — it comprises somewhere between 6% and 7% of revenues, so it’s also not insignificant.
Consequently, there are undoubtedly buyers out there who are in NVDA stock for its potential upside in the cryptocurrencies market. If bitcoin suddenly collapses or the mania surrounding cryptocurrency suddenly fades, those buyers will likely ditch NVDA stock.
As such, NVDA stock has sizable risk exposure to the bitcoin bubble popping.
The other thing that makes me nervous about NVDA stock is insider selling.
Insiders have been selling a lot of stock recently, including the CEO, who sold a sizable chunk of NVDA stock back in September. When insiders start selling a richly-valued stock after a huge run-up, that is usually a warning sign that the rally may be in its later stages.
Due to increasing cryptocurrency exposure and insider selling, I’m more cautious on NVDA stock now than I have been over the past several months.
NVDA Stock Is Still a Buy
But NVDA stock is still a buy by my numbers.
Cryptocurrency mining aside, the other 94% of NVDA is a big growth story with exposure to all things related to artificial intelligence.
The company provides parts for hyper-scale data centers. As more and more data migrates to the cloud, demand for NVDA products here will remain strong.
NVDA also provides the technology that powers self-driving cars. New product launches like the Nvidia Drive PX Pegasus, coupled with growing demand for driverless vehicles, will keep growth strong in this segment for many years to come.
NVDA is also behind next-gen gaming, video capture, data visualization, autonomous machines, and all other things AI-related. Indeed, the company recently scored a partnership with GE Healthcare which underscores the far-reaching implications of AI (and the far-reaching demand for NVDA products.)
All together, revenue growth is big and not slowing (37% growth expected this year versus 38% last year.) Consequently, earnings growth will also remain robust. The Street thinks earnings growth will be 20% per year over the next several years. Given NVDA’s ability to consistently top estimates (9 consecutive quarters of earnings beats), the realistic growth rate is likely somewhere around 25-30%.
The S&P 500 is currently trading at double its growth (20x this year’s earnings for 10% projected growth.) NVDA easily deserves the same premium. A 55x multiple on this year’s $4.20 consensus earnings estimate implies a fair value of about $230.
Bottom Line on NVDA Stock
With increasing cryptocurrency exposure and some big insider selling, NVDA stock is not without its risks here.
But the underlying secular growth narrative is only gaining momentum, and the numbers imply more upside from here.
Consequently, I’m a buyer on this dip.
As of this writing, Luke Lango was long FB, AMZN, NFLX, GOOG, NVDA, M, and JWN.