Shares of chipmaker NVIDIA Corporation (NVDA) have gained 6.6% over the past month and 83.3% over the past six months to close the last trading session at $240.63. Optimism about NVDA’s performance in high-growth markets, including data centers, automotive, and AI, drove investor sentiment. The stock is currently trading above its 50-day and 200-day moving averages of $202.65 and $167.35, respectively.
However, given NVDA’s underwhelming financial performance in the fourth quarter and fiscal 2023, significantly high valuation, and near-term macroeconomic headwinds, I think it could be wise to wait for a better entry point in the stock.
In this piece, I have discussed several reasons investors should not invest in this chip stock despite its solid price performance.
NVDA’s shares are on an uptrend, given analysts' bullishness on the company’s AI vision. The chipmaker seems well-positioned to cash in on the open-ended growth opportunities presented by AI. AI adoption is at an inflection point, with the recent viral success of Open AI’s ChatGPT, which allowed people to experience AI firsthand and showcased different possibilities with generative AI.
Jensen Huang, founder and CEO of NVDA said, “We are set to help customers take advantage of breakthroughs in generative AI and large language models. Our new AI supercomputer, with H100 and its Transformer Engine and Quantum-2 networking fabric, is in full production.”
The company is increasingly partnering with leading cloud service providers to offer AI-as-a-service that provides enterprises access to NVDA’s AI platform.
Despite its long-term growth potential in AI, NVDA reported disappointing results for the fourth quarter and fiscal year 2023. In the fourth quarter that ended January 29, 2023, the company reported revenue of $6.05 billion, down 21% year-over-year. Also, its non-GAAP net income and EPS declined 35% and 33% year-over-year to $2.17 billion and $0.88, respectively.
Furthermore, the company is expected to deal with near-term macro headwinds, including eroding consumer spending amid high inflation and rising interest rates, supply chain disruptions, and growing export restrictions.
Here’s what could influence NVDA’s performance in the upcoming months:
Deteriorating Financials
NVDA’s revenue decreased 20.8% year-over-year to $6.05 billion, and its non-GAAP gross profit declined 23.3% year-over-year to $3.83 billion for the fiscal 2023 fourth quarter ended January 30, 2023. Its non-GAAP operating expenses increased 22.7% year-over-year to $1.78 billion.
Furthermore, the company’s non-GAAP income from operations declined 39.5% year-over-year to $2.22 billion. Also, its non-GAAP net income fell 35.1% year-over-year to $2.17 billion, while its non-GAAP EPS came in at $0.88, down 33.3% year-over-year.
Impressive Historic Growth
NVDA’s revenue has increased at a 35.2% CAGR over the past three years. During the same period, the company’s EBITDA and net income have grown at 30.2% and 16% CAGRs, respectively. Also, its EPS has increased at a 15.5% CAGR.
Mixed Analyst Estimates
Analysts expect NVDA’s revenue for the fiscal 2024 first quarter (ending March 2023) to decline 21.4% year-over-year to $6.51 billion. The consensus earnings per share estimate of $0.91 for the current quarter indicates a decline of 32.9% year-over-year.
However, analysts expect the company’s revenue and EPS for the fiscal year (ending January 2024) to increase 10.2% and 33.3% year-over-year to $29.72 billion and $4.45, respectively. Likewise, the company’s revenue and EPS for fiscal 2025 are expected to grow 36.6% and 31.6% year-over-year to $35.59 billion and $5.86, respectively.
Stretched Valuation
In terms of forward non-GAAP P/E, NVDA is currently trading at 54.05x, 180.5% higher than the industry average of 19.27x. The stock’s forward EV/Sales multiple of 19.02 is 616.7% higher than the industry average of 2.74. Also, its forward EV/EBITDA of 57.90x is 358.2% higher than the industry average of 12.64x.
In addition, in terms of forward Price/Sales, the stock is currently trading at 19.97x, 660.6% higher than the industry average of 2.63x. Its forward Price/Cash Flow multiple of 55.90 is 227.8% higher than the industry average of 17.05.
High Profitability
NVDA’s trailing 12-month gross profit margin of 56.93% is 16.5% higher than the 48.89% industry average. Its trailing 12-month EBITDA margin of 26.40% is 135.3% higher than the 11.22% industry average. Likewise, the stock’s trailing 12-month net income margin of 16.19% compares to the industry average of 2.92%.
Furthermore, NVDA’s trailing-12-month ROCE, ROTC, and ROTA of 17.93%, 9.61%, and 10.61% compare to the industry averages of 4.87%, 3.19%, and 1.55%, respectively.
POWR Ratings Reflect Uncertainty
NVDA has an overall C rating, equating to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. NVDA has a D grade for Value, in sync with its higher-than-industry valuation. Also, the stock’s 24-month beta of 2.02 justifies a D grade for Stability.
In addition, NVDA has a C grade for Growth, consistent with its weak financials and mixed analyst estimates. The stock also has a B grade for Quality, in sync with higher profitability relative to its industry peers.
NVDA is ranked #66 out of 91 stocks in the Semiconductor & Wireless Chip industry. Click here to access NVDA’s POWR ratings for Momentum and Sentiment.
Bottom Line
NVDA reported disappointing fourth-quarter and fiscal 2023 financials. While the company is well-positioned to capitalize on the accelerated interest in the capabilities of generative AI, analysts are bearish about its near-term prospects. The company’s revenue and EPS for the ongoing quarter are expected to decline 21% and 33% year-over-year, respectively.
Macroeconomic challenges, including declining consumer spending amid high inflation and growing borrowing costs, supply chain constraints, and export restrictions, will likely impact the company’s revenues and earnings in the near term.
Given NVDA’s bleak financials, elevated valuation, and near-term macroeconomic uncertainties, waiting for a better entry point in this high-flying chip stock could be wise.
Stocks to Consider Instead of NVIDIA Corporation (NVDA)
Given its uncertain short-term prospects, the odds of NVDA outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) or B-rated (Buy) stocks from the Semiconductor & Wireless industry instead:
STMicroelectronics N.V. (STM)
SUMCO Corporation (SUOPY)
inTest Corporation (INTT)
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NVDA shares were trading at $236.90 per share on Wednesday morning, down $3.73 (-1.55%). Year-to-date, NVDA has gained 62.13%, versus a 1.19% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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