Nvidia Stock Is a Risky Bet Following Q3 Earnings

In the past 12 months, the fairy tale for Nvidia (NASDAQ:NVDA) stock has just kept going. Nvidia has more than doubled in the past year. NVDA stock is now up nearly 1,300% in the past five years and 8,200% in the past 10 years.

Nvidia (NVDA) stock logo on a smartphone.
Source: Allmy / Shutterstock.com

On Wednesday, Nvidia reported another batch of big numbers. Nvidia is exposed to some of the biggest growth trends in technology. For young people investing for retirement today, I think NVDA stock is a great long-term holding.

But investors should understand just how expensive the stock is at current levels. NVDA stock isn’t as much of a no-brainer buy as it may seem at first glance.

NVDA Stock Numbers

On Wednesday, Nvidia reported third-quarter adjusted earnings per share of $1.17 on revenue of $7.1 billion. Both numbers topped consensus analyst estimates of $1.11 and $6.82 billion, respectively. Revenue was up 50% from a year ago.

Data center revenue was $2.9 billion, up 55% year-over-year. Gaming revenue was $3.2 billion, up 42%. Gaming segment revenue growth slowed from 85% last quarter. Data center growth increased from 35% in the second quarter. Management said data center strength was driven largely by enterprise demand for artificial intelligence applications.

Auto sales were also down 11% sequentially to $135 million. However, management said that decline is somewhat deceptive given the auto industry is struggling with other supply constraints.

Nvidia also sold $105 million cryptocurrency mining graphics cards, down from $266 million in the second quarter.

Nvidia’s professional visualization business is much smaller, but it’s the company’s highest-growth segment these days. In the third quarter, Nvidia reported $577 million in professional visualization revenue, up 144% from a year ago.

Looking ahead, Nvidia guided for fourth-quarter sales of $7.4 billion, well ahead of analyst estimates of $6.86 billion.

Analysts Weigh In

Analysts are clearly all-in on NVDA stock.

“We expect NVDA’s data center business to outgrow peers, reflecting an appetite from cloud customers to invest in GPU capabilities, which offers greater processing speeds for expanding AI workloads from enterprise customers as well as inferencing potential,” CFRA analyst Angelo Zino says.

CFRA is projecting Nvidia will more than double its fiscal 2021 revenue by fiscal 2024. The firm has a “buy” rating and $330 price target for NVDA stock.

Bank of America analyst Vivek Arya named NVDA stock a top sector pick ahead of Wednesday’s earnings report.

“The stock’s 50%+ run in the past three months (vs. SOX up 14%) makes it vulnerable to some profit taking, but we believe any pullbacks could be short-lived ahead of a solid CY22+ pipeline and largely market-weighted holding among U.S. investors,” Arya said.

It turns out investors are unlikely to get that dip Arya said they should buy. NVDA stock initially traded higher by 4.5% in after-hours trading following the report. Bank of America has a “buy” rating and $340 price target for NVDA stock.

In fact, seemingly all of Wall Street is bullish on Nvidia. Among the 43 analysts covering Nvidia, the stock has 36 “buy” ratings and just two “sell” ratings.

How To Play It

First off, Nvidia is clearly firing on all cylinders as a company. But investors should understand NVDA stock is a classic growth stock. Nvidia bears likely don’t take exception to the company’s growth outlook. Anyone arguing against long-term growth in AI, high-end gaming, cloud computing and autonomous vehicle technology is a moron.

Instead, many NVDA stock bears are simply skeptical of the stock’s valuation. NVDA shares are currently trading at 62.4x forward earnings. The stock’s price-earnings-growth (PEG) ratio is 3.2. It’s price-sales ratio is 33.4. All of these metrics suggest NVDA stock is extremely overpriced at the moment.

Remember those analysts that all love Nvidia? They seem to agree the stock isn’t cheap. Those same 43 analysts that overwhelmingly have “buy” recommendations for Nvidia have an average price target of $260. NVDA stock is currently trading at around $325.

I wouldn’t recommend anyone go all-in on NVDA stock at this point. The valuation is full, and the near-term risk is to the downside. If you are a Nvidia bull, keep the stock on your watchlist for now and wait for a better opportunity to buy.

On the date of publication, Wayne Duggan 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.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.


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