Owners of Nvidia (NASDAQ:NVDA) stock should know you don’t have a profit until you sell the asset and have cash in your pocket.
I’m one of those shareholders. I got in two years ago, at $151. I now have four times more shares than I did then. Thanks to this year’s stock split, each is worth $221.
Nvidia has a market cap of around $569 billion on expected sales of $21 billion. That’s also 82 times its expected earnings.
Second quarter earnings beat estimates, with net income of $1.04/share and revenue of $6.5 billion. Nokia has guided to $6.8 billion of revenue in the current quarter.
Is it time to take something off the table?
Why NVDA Stock Is So High
Nvidia, as I have said many times, is a software company masquerading as a hardware company.
Nvidia designs graphics processors. These have huge markets in gaming consoles, Bitcoin rigs, data centers and artificial intelligence. Taiwan Semiconductor (NYSE:TSM) is its foundry.
This means Nvidia can harvest software margins on hardware. It doesn’t bear the enormous cost of production, as TSMC and rival Intel (NASDAQ:INTC) do.
About one-third of every dollar coming into Nvidia becomes net income. With revenue expected to be up 37% this year, after a 45% increase the year before, you can see why NVDA stock is pricey.
As its range of application shows, rapid calculation is the hottest thing in computing right now. Graphics processors were developed to offload compute-intensive tasks from general processing units (GPUs), like the Intel x86 series. GPUs and CPUs work together.
That’s why the announcement that Nvidia would buy CPU designer ARM Holdings from Softbank (OTCMKTS:SFTBY) for $40 billion last year supercharged NVDA stock. A
RM licenses a basic CPU design to other designers and is at the heart of the Apple (NASDAQ:AAPL) A1 chip, among many others. The ARM deal had some wags predicting Nvidia might someday surpass Apple in valuation.
Is NvidiaToo Big?
Nvidia has yet to gain clearance for the ARM deal. Opposition is mounting, especially in Europe.
UK regulators have already given a preliminary thumbs-down. The fear is that Nvidia would use ARM to boost its own designs, rather than share innovations equally with all its customers.
This has some wags suggesting Nvidia should walk away from ARM and buy VMWare (NYSE:VMW) instead. The virtualization software company is worth about $60 billion.
Buying VMWare would improve Nvidia’s data center story. There it already owns Mellanox, whose “storage fabric” and software improves data center performance.
Beyond all this lies the “metaverse.” This is a combination of artificial intelligence, virtual reality, and augmented reality that can bring users inside a computer application, creating a virtual world.
Nvidia is bringing both software and video tools to the party, which combines technologies worth trillions of dollars into a larger whole.
The Bottom Line
This year has been enormous for Nvidia. NVDA stock is up 75% just since January.
That’s why, even though I’m a long-term bull, I’ve been recommending investors lighten up.
After I last suggested traders take profits, however, other investors piled in. By mid-August, Nvidia had taken out its previous high. That’s why I have failed to pull the trigger on my own recommendation.
My concern now, however, is for the whole market. Investors own lots of garbage. New markets will come into being after the infrastructure bill passes.
Uncertainty will send the market down and you will want cash to seize the opportunities. Nvidia may be a good place to find it.
On the date of publication, Dana Blankenhorn held long positions in NVDA, TSM, AAPL and INTC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.
