Traders have been dumping Nvidia (NASDAQ:NVDA) stock for a month while investors wait for their opportunity to pounce.
It’s still not cheap. Trading today at around $278, Nvidia has a market cap of $707 billion.
Analysts are expecting revenue of $27.7 billion this year for the chip design company, and a net income of $4.34 per share. That means you’re paying 26 times revenue and 87 times earnings for the stock.
Its valuation has become a problem. No one is arguing that Nvidia’s future carries anything but sunlit uplands. There’s just a limit to what they will pay when inflation is rising and there are profits to be earned elsewhere.
The Catalyst for NVDA Stock
The catalyst for the move has been big bank analysts preferring other stocks.
A list of great stocks for 2022, issued by JPMorgan Chase (NYSE:JPM), included smaller rivals like Marvell Technology (NASDAQ:MRVL) and Broadcom (NASDAQ:AVGO), but omitted NVDA stock on valuation concerns. Broadcom did report strong earnings recently, and the stock has been rising.
The bank does see a complete global recovery next year, but that means companies which suffered during the pandemic are going to become good investments again.
Over the last three months, Ford Motor (NYSE:F) is up 51%, double the gain in Nvidia. Since Nvidia stock began rolling over a month ago, Ford is still up 2%, while Nvidia is down 6%. JPMorgan stock has done better than Nvidia. Even Verizon Communications (NYSE:VZ) has done better.
In the past, any dip in NVDA stock drew a quick response from analysts who love its long-term prospects. Revenues are still growing at nearly 20%, at scale, and earnings are growing even faster.
But now those analysts are faltering. The continuing chip shortage has customers turning to alternate suppliers, they argue. Intel (NASDAQ:INTC) is getting its act together and will eventually provide real competition.
Is This a Bargain?
Over the last five years, as Nvidia’s value has risen more than 10-fold. The company has continued to find new avenues of growth, but Nvidia’s dominance has now hit a brick wall of government intransigence.
Back in 2017, Nvidia was known for graphics. Gamers bought Nvidia graphics cards to get faster rendering on their games. Then cryptocurrency miners put Nvidia graphics cards in the heart of their mining gear.
Then cloud computing giants started buying Nvidia chips with both hands. Nvidia obliged by buying Mellanox, a communications equipment supplier to clouds. Now, with companies talking about the “metaverse,” Nvidia acceleration is seen as the best way to get there.
The climax was Nvidia’s bid to buy ARM Technologies from Softbank (OTCMKTS:SFTBY) for $40 billion. That would put Nvidia in the mainstream of microprocessor design. ARM designs are at the heart of Apple (NASDAQ:AAPL) microprocessors.
But the Federal Trade Commission has sued to block the deal, which could cost Softbank up to $74 billion, given how Nvidia stock has done in the meantime. Political arguments that “geopolitics is killing innovation” have proven unavailing.
It’s unclear who else might buy ARM. Letting the prize go to Arab-backed Global Foundries or Korea’s Samsung (OTCMKTS:SSNLF) is one option. So are Broadcom and Qualcomm (NASDAQ:QCOM), although their valuations are just five times greater than the original ARM deal’s value. Intel is a direct competitor to ARM.
The Bottom Line
If you’re looking to sell what you buy today in 2022, don’t buy Nvidia. Chase the trends instead.
On the other hand, if you’re looking to hold something for five years, Nvidia remains a good buy. Its prospects remain bright, even without ARM. Artificial intelligence, virtual reality and the metaverse are coming, and Nvidia designs will be at their heart.
On the date of publication, Dana Blankenhorn held long positions in AAPL, INTC and NVDA. 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. Write him at firstname.lastname@example.org or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.