With the NASDAQ headed for the clouds, powered by just a few companies, Nvidia (NASDAQ:NVDA) has become a battlefield stock.
By conventional measures, the current valuation of NVDA stock is ridiculous. It opened trade August 26 at almost $512 per share. That’s a market cap of almost $315 billion for a company with trailing year revenues of $12 billion.
It’s true that Nvidia’s most recent quarter was spectacular. Revenue was up 25% over the previous quarter at $3.87 billion, and net income was $1.37 billion, $2.18 per share, using non-GAAP measurements. (GAAP earnings were less than half that.) At its present rate of growth, 25% per quarter, maybe Nvidia could see fiscal 2021 revenue of $16 billion.
But the current price would still be 18.5 times sales.
Tapping the Brakes on NVDA Stock
That’s why our Luke Lango is among those tapping the brakes. The current valuation is “too stretched to ignore,” he writes.
The comeback is based on research done by computer scientists at my alma mater, Rice University (go Owls). They used new algorithms to speed artificial intelligence without graphics processors. The “Sub-LInear Deep learning Engine” (SLIDE) turns neural network training into a search problem that can be solved with hash tables.”
Before you run out and buy Intel, however, SLIDE is software. Speed benefits everyone, and graphics processors aren’t being made obsolete. As grad student Beidi Chen said, “Ours may be the first algorithmic approach to beat GPU, but I hope it’s not the last.” The research was backed by the National Science Foundation and the Defense Department.
There are other catalysts for NVDA stock. Nvidia’s graphics chips running on Alphabet’s (NASDAQ:GOOGL) Google Cloud can deliver a gaming experience to ordinary Chromebooks comparable to specialized gaming systems.
Nvidia’s data center revenue has now surpassed gaming revenue. Mellanox, the communications fabric company that’s now part of Nvidia, is proving a wise acquisition, with 14% of company revenue.
Nvidia is also circling ARM, a designer of general purpose chips now controlled by Softbank (OTCMKTS:SFTBY). Owning ARM would solve any problem created by clever Rice people. CEO Jensen Huang wouldn’t comment on his recent earnings call. But Softbank paid $32 billion for ARM, so Nvidia’s current valuation makes the deal affordable.
All this is leading to higher earnings estimates and price targets, for Nvidia. Piper Sandlin sees earnings of $9 per share this year, and $10.68 next year. Trefis has raised its price target on the stock to $700, a gain of nearly 40%. One analyst at Jefferies now calls Nvidia “the Apple (NASDAQ:AAPL) of the data center.” (Whatever that means.)
TV analyst Jim Cramer also says “you need to buy” Nvidia. He sees a gaming event scheduled for September 1 as the next catalyst. But he also wants you to buy on a dip.
The Bottom Line
So long as the current fashion, abundant liquidity for just a few winners, remains intact, Nvidia and stocks like it can melt up.
But fashions change, and NVDA stock is selling at more than its fundamental value. Intel had sales of $72 billion last year, six times those of Nvidia, but its shares are worth one-third less? Uh, no.
Fears that Nvidia could plunge to $200 are also overblown. This company is a long-term winner, and CEO Huang is the new Andy Grove.
Still, you shouldn’t fall in love with your stocks. I bought Nvidia in May 2019, at $151. You don’t have a profit until you sell and the cash is in your hand.
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 firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in INTC, NVDA and AAPL.