I love Nvidia (NASDAQ:NVDA) and NVDA stock. But can any stock be worth 17 times revenues while unemployment is near 20% and the Dow Jones Industrial Average still in bear market territory?
Nvidia was due to open for trade May 8 at $307.75, just $8 per share from its all-time high of February. Moreover, its market cap is now over $183 billion, and the price-earnings ratio of 66. The stock also sits well above its one-year price target of $300 per share.
Of course, price targets can change. They’re just a guess by analysts. The Nvidia bulls at Piper Sandler just raised their target on Nvidia to $350, based on the completion of its Mellanox acquisition. Additionally, our Matt McCall also calls NVDA stock a “buy.” I even have some shares in my own retirement account.
So with all of that in mind, let’s take a closer look at NVDA stock.
Cloud stocks like Nvidia appear invulnerable to the novel coronavirus because the cloud continues to prove its worth.
That said, Nvidia is at the center of it. Its graphics chips and operating software are the best way for clouds to upgrade for artificial intelligence and the machine Internet. Its acquisition of Cumulus Networks, which makes Linux-based network switches, will turbocharge its data center growth.
Moreover, Nvidia started as a gaming chip company. The fast refresh needed to make games seem realistic is also the key to making clouds responsive to the edge of the network. That said, the Cloud Czars — led by Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) — are buying gear with both hands. Cloud capacity is constrained by a “rush to the rail” from the coronavirus, and this has compressed years of new demand into months. It has made the dream of a mass work from home market a reality, and has kept the economy going through the pandemic.
That said, Nvidia is already ahead of the curve with a new development approach called MLops. This combines development operations with machine learning to automate software development itself.
Approaching the Limit
However, there is a limit. Nothing can grow to the sky. Clouds cut costs, they reduce the need for employment, but there must be an economy for them to serve.
But, that economy is crashing.
Additionally, analysts are expecting Nvidia to report earnings per share of $1.68 on revenue of $2.8 billion later this month. That said, those are just about the same numbers as what was reported for the previous quarter. Sales could accelerate from here, but clouds were built on the idea of lowering costs to the floor. The biggest cloud companies, like Alphabet (NASDAQ:GOOGL), are also becoming chip developers. Therefore, there will always be competition for Nvidia.
Based on its growth rate and the underlying global economy, NVDA stock is getting more expensive than, what exactly? Nvidia shares have done more than twice as well as the SPDR Gold Trust (NYSEARCA:GLD). Moreover, diamond sellers LVMH (OTCMKTS:LVMUY) are down almost 20% on the year, while Nvidia shares are up 32%. Nvidia has also tripled the gain in Gladstone Land (NASDAQ:LAND), the raw land Real Estate Investment Trust (LAND).
The rush to the cloud makes sense, from a business and practical standpoint. However, the stampede is close to becoming a mania — and such things always end poorly.
The Bottom Line
To call Nvidia shares today fully priced is an understatement. Investors are piling into the cloud because nothing else is working. Enterprises of all sorts cut their costs with cloud. Clouds are deflationary, and ultimately, they’re job killers.
Clouds justify investor love. They pay for themselves, but there must be an economy for them to serve, or the savings they create is just deflation. The Fed’s dramatic increase in the money supply mean there’s a ton of cash sloshing around, looking for a place to go.
Overall, a cloud crash could be coming. And when it does, Nvidia will not be immune.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT, AMZN, and NVDA.