I have been a long-time Nvidia (NVDA 4.05%) supporter. However, even I have concerns about the current state of Nvidia stock.
Let’s consider this: Nvidia’s stock has recently undergone its first 20% drawdown since the beginning of 2023.
In essence, the market has found a weakness in Nvidia’s performance. While Nvidia has rebounded from its recent lows and could potentially reach new highs, the question arises – is it time to be concerned about the potential end of Nvidia’s impeccable long-term growth trajectory? Let’s delve deeper to find out.
What is the current situation with Nvidia?
After hitting an all-time high of $140.76 in June, Nvidia’s shares have dropped by 27%. While this percentage may not seem significant, it’s important to note that at its peak, Nvidia held a market cap of over $3.2 trillion, briefly becoming the world’s largest public company.
During this decline, Nvidia lost over $650 billion in value – roughly equivalent to the total market cap of Tesla, which is America’s 10th largest company.
Therefore, Nvidia’s recent decline is substantial not only in terms of monetary value but also raises concerns about the reasons behind such a steep drop. The possibility of fundamental weaknesses within the company and its stock is a looming question.
Let’s analyze the data to gain insights.
Tale of the tape: How does Nvidia stack up?
Undoubtedly, Nvidia’s stock has soared in recent years. The underlying success can be attributed to two main factors:
- Increasing sales
- Rising expectations of future sales
In simple terms, Nvidia’s stock has surged due to significant revenue growth and continually rising expectations for future revenue. But can this trend sustain itself?
Examining Nvidia’s revenue over the past couple of years reveals a substantial increase – from $25 billion annually to over $75 billion annually, primarily driven by high GPU sales, the driving force behind artificial intelligence (AI).
However, the stock’s success is not solely dependent on revenue growth. Investors have been willing to pay a premium based on escalating expectations of future revenue growth, leading to a significant rise in Nvidia’s price-to-sales (P/S) ratio. From under 10 times in 2022, the P/S ratio recently reached a notable 42 times.
The rationale behind this shift is the anticipation of rapid sales growth by investors. Analysts project Nvidia’s sales to nearly double to approximately $120 billion this year. However, potential concerns arise here.
What if these analysts revise their revenue growth estimates for Nvidia or even lower them? This scenario would challenge the significant valuation premium that investors have been paying (as indicated by Nvidia’s P/S ratio) and could lead to another substantial sell-off in the stock.
For insights into the possibility of such scenarios, let’s analyze this chart reflecting how Wall Street analysts have adjusted their revenue forecasts over the last three years.
This chart displays the adjustments made by analysts to their future revenue estimates for Nvidia (two quarters ahead) over the past 30 days. Peaks signify significant increases (positive for the stock), while valleys indicate decreases (negative for the stock).
Over the past two years, there have been more peaks than valleys, although the size of these peaks has been diminishing. This suggests that with each quarterly report, analysts have been aligning their estimates closer to Nvidia’s sales guidance. In essence, Wall Street’s expectations are slowly converging with reality. If this trend persists, a balance between these factors should be reached, and potentially, a reversal might occur – with company guidance falling below expectations, analysts adjusting their revenue forecasts downwards, resulting in valleys on the chart and a decline in Nvidia’s stock price.
What can investors take away from this?
In summary, Nvidia’s stock has experienced a meteoric rise for nearly two years. The company’s sales and future sales expectations have also surged. However, these high expectations have inflated its stock valuation, making it susceptible to sharp declines. Investors should approach Nvidia stock with caution. Although the company maintains a strong position for the long term, the current volatility suggests that the stock may not be a suitable fit for all investment portfolios at this moment.