NVIDIA May Be Flying Too High

Investors who buy stocks at very high valuations often learn the hard way that valuations do matter most of the time. For example, investors that bought Cisco Systems Inc. (CSCO) stock in March 2000 still haven’t gotten their money back 23 years later. The latest stock that might suffer the same fate is NVIDIA Corporation (

NVDA, Financial), a company that can do no wrong and grow forever according to analysts and investors, just like Cisco back in the day.

NVIDIA’s invention of the graphics processing unit (GPU) in 1999 fueled the growth of the PC gaming market and revolutionized modern computer graphics and parallel computing. More recently, the GPU jumpstarted the modern version of Artificial Intelligence. The company’s Graphics segment provides GeForce GPUs for gaming and PCs, the GeForce NOW game streaming service and related infrastructure and solutions for gaming platforms. The  Quadro/NVIDIA RTX GPUs is for enterprise workstation graphics and vGPU software for cloud-based visual and virtual computing; automotive platforms for infotainment systems; and Omniverse software for building 3D designs and virtual worlds.

The Compute & Networking segment provides data center platforms and systems for AI, HPC, and accelerated computing, Mellanox networking and interconnect solutions, automotive AI Cockpit, autonomous driving development agreements, autonomous vehicle solutions, cryptocurrency mining processors, Jetson for robotics and other embedded platforms, and NVIDIA AI Enterprise software.

The company was founded in 1993 and currently has a market capitalization of $1.1 trillion.

Financial review

The company released fiscal 2^nd quarter results for the period ending July 30^th, 2023 which again showed impressive growth in revenue and earnings. Revenue for the second quarter ended July 30, 2023, was $13.51 billion, up 101% from a year ago and up 88% from the previous quarter.

GAAP earnings per share for the quarter were $2.48, up 854% from the prior year period and up 202% from the previous quarter. Non-GAAP earnings per share were $2.70, up 429% from a year ago and up 148% from the previous quarter.

In the 2^nd quarter, the company returned $3.4 billion to shareholders in the form of 7.5 million shares repurchased totaling $3.28 billion and cash dividends of $199 million. As of the end of the quarter, the company had $3.95 billion remaining under its share repurchase authorization. On August 21, 2023, the company approved an additional $25.0 billion in share repurchases. However, buying back shares at high valuations often destroy shareholder value for some companies.

The company’s balance sheet remains strong with $16.0 billion in cash and $9.7 billion in total debt.

NVIDIA CEO stated, “A new computing era has begun. Companies worldwide are transitioning from general-purpose to accelerated computing and generative AI.”

Valuation

Nvidia stock is very expensive after the stock has appreciated so much in recent years. Analyst consensus EPS estimates for the 2023 fiscal year ending January 2024 are $10.76. Analysts are optimistic about continued strong earnings growth as estimates for the following fiscal year jump to $16.71. However those are non-GAAP numbers. GAAP EPS estimates are approximately $9.50 for this year and $15.00 for next year. That puts the company selling at 48 times this year’s earnings. The EV/EBITDA ratio is also elevated at approximately 41 times fiscal 2023 estimates.

The Gurufocus DCF calculator produces a value of $335.00 per share when using $9.50 in EPS as the starting point and a 10-year growth rate of 20%. Using forward earnings of $15.00, the price target jumps to $529.00 per share, or roughly 13% upside.

There are 40 analysts covering the company with 39 of them having buy ratings, despite a runup in the stock price of 234% over the past 52 weeks and 574% over the past five years. The average target price is $636.00 with a high target of $1,100.00 and a low target of $475.00. That’s not a typo as one analyst thinks Nvidia stock should be selling at 115 times earnings.

The company pays a tiny annualized dividend of $0.16 per share, but due to increases in the stock price, the dividend yield is only 0.03%.

Guru trades

Gurus who have purchased Nvidia stock recently include

George Soros (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio). Gurus who have reduced their holdings include Ken Fisher (Trades, Portfolio) and Catherine Wood (Trades, Portfolio).

Summary

The company has made an impressive strategic shift from just a PC graphics card manufacturer to the high-end gaming, enterprise, cloud, automotive, and artificial intelligence markets. However, tailwinds do exist such as growing competition from Advanced Micro Devices, Inc. (

AMD, Financial), Marvel Technology Inc. (MRVL, Financial), Broadcom Inc. (AVGO, Financial) and Intel Corporation (INTC, Financial) as well as weakness in consumer spending. In addition, the industry has been historically very cyclical and NVIDA may not be immune to those patterns.

The biggest risk of course is the sky-high valuations for the stock. It’s very possible and even likely that NVIDIA will be the Cisco of our generation and investors who buy the stock at these levels will likely not see a good return on their money for quite some time.