Nvidia's Earnings:Very Little Room For Error

Nvidia's stock now trades at a forward P/E (fiscal 2024) of around 65 here, making Nvidia one of the most expensive large-cap stocks globally. Additionally, there are uncertainties regarding Nvidia's earnings potential because of the economic slowdown, its GPU segment sales decline, and other elements. Nvidia's sky-high valuation, deteriorating technical posture, and questionable earnings potential could lead to a negative sentiment phase for its stock.

The company's revenues will likely come in at about $30 billion in fiscal 2024. So, Nvidia is trading around 25 times forward sales estimates. This valuation appears excessive because, in comparison:

Tesla, Inc. (TSLA) sells at five times 2023 sales and four times 2024 sales estimates.

Microsoft Corporation (MSFT), which is at around 11 times, while also expensive, is much cheaper than Nvidia.

Meta Platforms, Inc. (META) trades at 4-5 times forward sales here.

Alphabet, Inc. (GOOG, GOOGL) also trades at about the 4-5 times sales range.

Nvidia has robust growth and profitability potential, but at 25 times sales, the stock is costly. Furthermore, the economic backdrop remains cloudy, and Nvidia's sales and earnings growth projections may need to adjust lower as the slowdown proceeds. Therefore, Nvidia could have a sharp selloff, primarily because earnings expectations are incredibly high, and investors are paying a massive premium here to own the stock. Thus, there is very little room for error, and with so many new buyers in Nvidia recently, there may be a mass exodus next.

Future earnings are complicated, as they are projections, and no one knows precisely what the economic landscape will look like in the coming years. Nevertheless, Nvidia's fiscal 2025 EPS estimates vary dramatically. The EPS estimates range from about $5-8, with the average EPS projection around $6. Also, we're discussing non-GAAP figures here, and Nvidia still trades around a 50 P/E ratio relative to its fiscal 2025 projections.

So, What Could Go Wrong?

While Nvidia's prospects remain solid, especially in its data center segment, Nvidia's gaming GPU segment could continue to struggle due to a slowdown in the general economy and the lost business from cryptocurrency GPU sales. Additionally, Nvidia's data center revenue growth could slow more than anticipated, worsening sentiment in the company's stock price as we advance.

The "Ethereum Merge" occurred last September and essentially cut Nvidia GPUs from the mining business. Thus, we saw a significant decline in Nvidia's GPU sales, a dynamic that could continue plaguing the company as we move on. Also, the company made inadequate disclosures to investors, according to the SEC, regarding the percentage of its GPU sales going toward the cryptocurrency segment. This situation could have been handled differently, but unfortunately, Nvidia managed it the way it did.

Nvidia is an excellent company, and while I believe in its long-term potential, Nvidia is overbought and overvalued now. Nvidia tends to become highly overbought in some instances, and substantial corrections of 20% or greater are not uncommon for its stock.