I’ve been bullish on Nvidia (NASDAQ:NVDA) stock for a long time.
![NVDA stock](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
My bullishness started back when NVDA stock was trading at $150 in June 2019, and has been maintained has shares have climbed above $200, above $300 and above $400.
But with Nvidia stock now closing in on $500, I think it’s time to pump the brakes on this next-gen, hyper-growth semiconductor company.
There’s nothing wrong with the fundamental growth story. The company’s blowout second quarter numbers and exceptionally strong third quarter guide prove as much. Nvidia’s growth fundamentals are as strong as ever.
But the valuation on NVDA stock is now too stretched to ignore.
Yes, shares have been slightly overvalued for a long time. But they are now way overvalued. To a point where I’m no longer comfy recommending the stock at these levels.
And so, I put on my cautious hat. Not bearish, but not bullish, either. Simply cautious.
Nvidia’s Fundamentals Are Strong
You really can’t knock the fundamentals underlying NVDA stock. They are about as strong as you’ll find in the market.
Through a portfolio of next-gen CPUs and GPUs, Nvidia has thrust itself into the epicenter of multiple hyper-growth markets which require those next-gen CPUs and GPUs to operate. Markets like self-driving, gaming, cloud, virtualization, IoT, AI, so on and so forth.
CPU and GPU demand from these end-markets remains exceptionally robust today, even in the middle of a global pandemic. In the second quarter of 2020, Nvidia reported 50% revenue growth, boosted by 167% data center growth and 26% gaming growth. In the third quarter, revenues are expected to rise 46%.
This robust demand won’t cool off anytime soon. The widespread proliferation and global standardization of 5G over the next few years will spark huge growth in all of Nvidia’s core end-markets, including IoT, self-driving, gaming and AI. Meanwhile, an accelerated enterprise shift towards hybrid work environments will promote continued robust demand from the cloud data center market.
So, for the next several years, Nvidia will sustain huge revenue growth.
At the same time, margins are dramatically improving. Gross margins rose 590 basis points last quarter to a record-high 66% and should continue to improve, supported by strong demand, rising prices, falling production costs and positive operating leverage.
Net net, the fundamentals say that Nvidia projects as a big revenue grower over the next several years with big upside margin drivers. That’s a combination which will lead to huge profit growth at the company.
The Valuation Is Too Stretched
Normally, as go profits, so go stocks.
That’s why I’ve been consistently bullish on NVDA stock over the past two years, despite minor valuation friction. Consistently large profit growth can brush aside minor valuation risks.
But as the NVDA stock price has risen over the past few years, those valuation risks have grown larger and larger.
Now, they are too big to ignore and arguably too big for strong fundamentals to brush aside.
My long-term model on Nvidia is very aggressive. The company owned about 2.6% of the global semiconductor market in 2019, with that market share projected to rise towards 3.7% in 2020. Because the company has the best GPUs and CPUs for all of tomorrow’s most important end-markets (like self-driving), I see this market share expansion persisting until Nvidia controls about 10% of the market by 2030. That’s an assumption that calls for 15% compounded annual revenue growth over the next decade.
I also see gross margins running to north of 70%, and operating margins closing in on 50% thanks to positive operating leverage.
Those are all extremely optimistic assumption for Nvidia’s growth trajectory in the 2020s.
Even those aggressive assumptions, though, don’t support NVDA stock at $500.
In a best-case scenario, I see Nvidia’s earnings per share hitting $40 by 2030. Based on a 20x forward earnings multiple and an 8.5% discount rate, that implies a 2020 price target for NVDA stock of under $400.
Thus, up at $500, the valuation on Nvidia stock is starting to look out of touch with the fundamentals.
Bottom Line on NVDA Stock
I love Nvidia stock. It’s a big time company with tons of innovation. And exceptionally favorable long-term growth prospects.
So it is with great reluctance that I say the best of this rally may be over, at least for now.
Selling at today’s highs and buying back on future dips seems like the best move here and now.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analyst and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not own a position in any of the aforementioned securities.