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Nvidia bulls undoubtedly look more up and forward. At Tuesday’s close to $ 249, the share is still 21% lower than in February. Long-term growth factors remain when short-term disruptions cease.
I’m sympathetic to that case. I became more constructive on the NVDA stock last year before the recovery in the second half of the key data market. Nvidia is one of the best companies in the semiconductor industry, and perhaps all technical. There is a strong argument for investors to focus on the long term and drive out any volatility in the short term with one of the market’s better companies.
But these sales have reminded investors that valuation is important. And Nvidia has a somewhat dubious valuation – even with the decline from February.
A high valuation
At $ 249, NVDA shares are traded at over 40x fiscal year 2020 (end of January) adjusted earnings per share, even a reversal of approximately $ 14 per share in net cash in the balance sheet.
To be fair, this multiple is inflated. FY2020 was an unusual year. Partly due to a “crypto hangover” and partly due to a break in the demand for data centers, revenues for the year actually decreased by 7%. Adjusted earnings per share fell by 13%.
Wall Street expected a rebound – and still does – at least based on published figures. The consensus estimate is close to $ 8 for FY2021 EPS and above $ 9 for FY2022. None of the estimates have moved that much, probably due to the fact that many companies have not updated their figures yet.
Nevertheless, the figures give at least a directed idea of where Wall Street snapped Nvidia’s earnings strength before the current crisis. And back close to $ 250, again excluding net cash, NVDA shares are trading at more than 25 times futures income.
It’s not a cheap multiple. In fact, I saw valuation issues at the end of 2019, with NVDA at about the same price (and estimates at about the same place).
I do not see these worries that necessarily diminished right now. They can actually rise for two reasons.
First, there will be a short and probable medium term for Nvidia’s results. The impact in the short term may not be so great: it is possible that teleworking and domestic consumers may increase demand for Nvidia chips. But if a recession comes, as is likely, it will put pressure on Nvidia’s revenue.
Again, it is 25 times the multiple based on estimates that are usually at least a month old; if these estimates fall, either the multiple must rise or the NVDA stock must fall as well.
The second issue is that this is simply not the same market. As I wrote in December, Nvidia’s growth in relation to its valuation was quite attractive in relation to the market at that time. With the Nasdaq Composite down 17% compared to previous years, this is not at all true.
In chips, Intel (NASDAQ: INTC) and Broadcom (NASDAQ: AVGO) have gone from cheap to really cheap (and potentially too cheap). So-called “semicaps” such as Applied Materials (NASDAQ: AMAT) and Lam Research (NASDAQ: LRCX) are interesting opposite purchases.
Nvidia’s rival, Advanced Micro Devices (NASDAQ: AMD), has also withdrawn, although its valuation is not conservative either.
If an investor is to enter this volatile market, there are a large number of quality companies with cheaper valuations. Especially after Tuesday’s bounce, it is difficult to see NVDA shares as compelling on a relative basis.
NVDA stock withdrawal
There is a broader point that is worth doing. Just because NVDA is cheaper than before, does not mean it is cheap.
For the market as a whole, these steep sales are not just about the short-term effect of the response to coronavirus. It is becoming increasingly clear that many investors, in retrospect, see broad market peaks in February as simply too high.
There is a case that the same applies to NVDA shares. Semiconductor shares have historically gained multiples below the market due to the industry’s economy; 25x futures income is not a multiple below the market.
Yes, Nvidia is growing faster than most chip stocks – and the most mature tech stocks as well. But even a premium on the market would suggest that $ 250 is in the right range for Nvidia.
I’m at least skeptical that this price is a huge opportunity – or close to the best opportunity on the market. Nvidia is a wonderful company. To at least some extent, it is priced, even after this sale.
Vince Martin has been covering the financial industry for nearly a decade for InvestorPlace.com and other stores. At the time of writing, he had no position in any of the above-mentioned securities.