BING-JHEN HONG
There is a lot to like about Nvidia (NASDAQ:NVDA). Leadership, market opportunity, product development and quality is world class.
This has been apparent for a long time with the company, which is why I started a position in Nvidia back in November 2018 in my IRA account. Less than four years later a $488.49 investment turned into $2,504.01 when I sold on January 24, 2022.
My IRA Account
I’ve been in and out of Nvidia a few other times over the years – but I’m 100% on the sidelines now because the stock is overvalued.
Depending on the share price and what estimates you are relying on, Nvidia’s forward price-to-earnings is over 50x. Price to sales is over 14x.
I don’t have a problem with investors buying stocks with P/E and P/S ratios this high. The market rewards companies with high multiples often if it’s coupled with high revenue growth.
In the past, Nvidia had strong revenue growth.
| Year | Revenue (Billons) | % Growth |
| 2014 | $4.13 | -4% |
| 2015 | $4.68 | 13% |
| 2016 | $5.0 | 7% |
| 2017 | $6.9 | 38% |
| 2018 | $9.71 | 41% |
| 2019 | $11.7 | 20% |
| 2020 | $10.9 | -7% |
| 2021 | $16.75 | 54% |
| 2022 | $29.14 | 74% |
| 2023 | $26.94* | -8% |
| 2024 | $29.45* | 9% |
| 2025 | $35.89* | 22% |
*Estimates via Seeking Alpha. Fiscal 2023 ends in January 2023 for Nvidia – so calendar 2023 is fiscal 2024.
Nvidia will close out Q4 when the company reports on or around February 22, 2023. Barring any extraordinary upside surprises the company will finish the year with a decline in revenue of 8%.
An argument could be made the slower forward growth rate is priced into the stock with Nvidia being down over 32% in one year as expectations for fiscal 2024/25 have been brought in by analysts consistently over the past six months.
The tricky part is do we believe the forward estimates for companies in the chip sector for 1-2 years out? More on that later, but let’s assume the estimates are close enough. Nvidia’s multiple is well higher than all peers.
| Company | 2023 Rev | Growth | 2024 Rev | Growth |
| AMD | $25.17B | +7% | $28.83B | +14.6% |
| P/S = 4.6x | P/S = 4x | |||
| Intel | $61.25B | -3.6% | $65.45B | +6.9% |
| P/S = 2x | P/S = 1.9x | |||
| QCOM | $40.23B | -8.9% | $45.44B | +13% |
| P/S = 3.4x | P/S = 3x | |||
| AVGO | $35.17B | +6% | $36.74B | +4.5% |
| P/S = 6.9x | P/S = 6.6x | |||
| NVDA | $29.45B | +9% | $35.89B | +22% |
| P/S = 14.8x | P/S = 12x |
Data: Seeking Alpha
Yes, Nvidia is expected to grow revenues faster in calendar 2023 and 2024 than its peer group. But it certainly doesn’t come cheap considering no other company has a forward P/S multiple over 7x when Nvidia’s is 12x-14.8x.
| Company | Forward P/E |
| AMD | 20.5x |
| Intel | 15.2x |
| QCOM | 11.7x |
| AVGO | 14.2x |
| Peer Average | 15.4x |
| NVDA | 54x |
From an earnings perspective, Nvidia is selling 3.5x higher than a peer group average.
While I am excited about Nvidia’s long-term prospects with autonomous vehicle and high-margin software products for the metaverse and AI – these are rounding errors from a revenue perspective.
The only two business units that matter for Nvidia are Gaming and Data Center.
Here are the Q/Q growth rates for each segment of the business.
| Quarter |
Data Center Growth Rate Q/Q |
Gaming Growth Rate Q/Q |
| Q1 2022 | 8% | 11% |
|
Q2 2022 |
16% | 11% |
| Q3 2022 | 24% | 5% |
| Q4 2022 | 11% | 6% |
| Q1 2023 | 15% | 6% |
| Q2 2023 | 1% | -44% |
| Q3 2023 | 1% | -23% |
Source: Nvidia
Broad industry trends in data center spendings are likely good enough to give Nvidia some hope in holding onto a meager growth rate in that category.
The greater challenge for Nvidia is gaming – which is largely driven by consumer discretionary spending on high performance gaming computers and crypto mining.
2020-2021 created a perfect storm for Nvidia’s GPU’s. Gamers were sitting at home (often with large stimulus checks) and decided to upgrade their setup. At the same time, newly released traditional gaming consoles from Microsoft (MSFT) and Sony (SONY) were hard to find.
More importantly, there was a Crypto currency bull market – where the same GPUs gamers demanded were being bought up for crypto mining rigs.
This drove up the demand and pricing for Nvidia’s GPUs. That has since reversed and GPU pricing has plunged.
If you’re willing to pay 15x forward sales and 54x forward earnings for Nvidia – part of your thesis must be that gamers are going to flock back to buying 4080 GPUs that have largely been mocked by the industry for being too expensive.
At the same time, a crypto bull run will need to materialize – in the wake of exchange drama with the FTX bankruptcy and the fact that high energy prices make mining largely unprofitable.
I have seen no overwhelming evidence expensive GPUs for either gaming computers or crypto mining are going to accelerate in demand over the next 12 months. Or that demand for Nvidia’s data center products will be so great that it makes up for the dramatic loss in revenues.
For this reason, I’m skeptical the estimate of 9% revenue growth in 2023 and 22% growth in 2024 is going to materialize for Nvidia.
Conclusions
Yes, Nvidia deserves a premium over some peers – particularly Intel and QCOM which are projecting negative 2023 growth rates and legacy customers moving on, notably Apple (AAPL).
However I can’t find compelling evidence that Nvidia’s gaming GPU business is going to rebound at any point in 2023. For 2024, it’s likely too early to make any definitive decisions – making paying a premium for the stock even more risky.
Considering Nvidia is now worth more than Meta (META), Tesla (TSLA), Taiwan Semiconductor (TSM), and 3x Netflix (NFLX) – I don’t see a reason to pay a huge multiple for a company that will finish 2022 with negative revenue growth and achieve single-digit revenue growth in 2023 at best.
For exposure to Nvidia surprising to the upside and/or holding its valuation – I’d rather buy the VanEck Semiconductor ETF (SMH) which lists Nvidia as a 9.11% weight, only behind TSM. Single stock exposure to Nvidia subjects an investor to declines we’ve seen in several of the high-flying names like Meta, Netflix and Tesla after those companies missed revenue growth targets.
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