Hold Off on Nvidia Stock and Wait for This Year’s Third Pullback

Where’s still-hot Nvidia (NASDAQ:NVDA) stock heading next? Analysts remain bullish on the graphics chip powerhouse. Investor sentiment remains strong as well. With so much behind it, this remains a stock you shouldn’t bet against. NVDA stock is trading at a price-to-earnings multiple of 84.3x.

NVDA stock
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At that number, it may be richly priced. But, shorting on valuation alone is a strategy that continues to fail in today’s stock market. So, does that mean you should dive in today at $700 per share, while it’s just a few percentage points below its all-time high?

Not so fast. Sure, its exposure to fast-growing areas may allow it to beat projections, which call for growth to start slowing down. And yes, even if growth does start to slow, it may not mean big time valuation contraction is to follow.

Yet, don’t take it to mean it’s smooth sailing to higher price levels. We could still see a repeat of the short-lived tech stock corrections that played out in February and May. Even if you’re bullish it’ll continue to crush expectations, waiting for the next major pullback may be your best move.

NVDA Stock and its Blockbuster Quarterly Results

In 2020, thanks to Covid-19 pandemic tailwinds, Nvidia shares took off like a rocket. But, by year’s end, investors cooled off a bit. The first few months of 2021 brought similar mixed performance. This included a brief pullback during the February tech stock sell-off. Yet, starting in April, enthusiasm started to make its return. The aforementioned May correction interrupted it a bit. But, since May 18, this “story stock” has continued to move higher, up nearly 26% as it has made new all-time highs.

So, what’s behind this continued high enthusiasm for NVDA stock? Mostly, it’s due to the company continuing to knock it out of the park with its quarterly results. For the fiscal first quarter (ending May 2, 2021), the chip-maker reported year-over-year revenue growth of 84%, driven by booming demand for its GPUs by end users in cloud computing, data centers and gaming.

Some investors have worried that its gaming chip growth was a one-and-done event. Why? Because of its connection to crypto. As you may know, crypto miners repurpose these gaming GPU chips for their operations. It’s unclear how much of the soaring demand for its gaming graphics chips comes from these end users.

But, the company says $155 million of its sales came from crypto-specific chips, with that number rising to $400 million for the current quarter. In short, the possible short-lived boost in mining-related GPU sales could be a drop in the bucket compared to the company’s more sustainable areas of growth. Yet, it’s still uncertain whether above-average growth is here to stay. Especially as projections for the next fiscal year say otherwise.

Continued Enthusiasm vs. Slowing Growth Projections

Given its recent strong results, it’s no surprise why analysts like Bank of America’s Vivek Arya remain bullish on NVDA stock. In a May 26 research note, the sell-side analyst reiterated his “buy” rating, giving shares with a $750 per share price target. The reason? Mostly, due to its most recent earnings beat. Plus, the growing indication that its gaming chip growth is sustainable, as seen from the company’s “ring fencing” of crypto-related sales, by diverting demand over to processors built specifically for mining.

It’s not just analysts who are still enthusiastic about Nvidia. As it’s still beating estimates, investors have plenty more reason to bid up its valuation, even as it’s already high (shares today sell for a forward P/E ratio of around 46.1x). Yet, while its recent growth has helped to expand its valuation, that’s not to say this trend will continue going forward.

Why? Revenue and earnings growth for FY2022 may come in at 50%+ above FY2021 numbers. But, after this high-growth year, things could decelerate in a big way. Analyst consensus for Fiscal 2023 (year ending Jan 2023) revenue to climb just 9.2%, and earnings to grow by only 8.7%.

Sure, investors may see Nvidia’s exposure to megatrends like artificial intelligence (AI) helping to sustain above-average rates of growth. But, priced as if this possibility is a certainty, you may not want to dive in while it’s near its all-time highs.

Bottom Line: Sit Tight For the Next Major Pullback

Again, a slowdown in growth may not equal an eventual big drop for Nvidia shares. And, if the company continues to beat projections? The stock could continue to make new highs. But, that doesn’t mean we won’t see some more volatility in the months ahead.

The rotation back into tech stocks may be only starting back up. But, given the sector remains overvalued, and the risk experts are wrong about recent inflation being temporary, we could see this space correct like it’s done twice so far this year. With the possibility of another big pullback ahead, even those bullish on NVDA stock should take their time.

On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

Article printed from InvestorPlace Media, https://investorplace.com/2021/06/nvda-stock-hold-off-wait-for-pullback/.

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