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NVIDIA Q1 FY24 earnings: Greatly beat expectations with stock price soaring 25%
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bullrider_21 joined discussion · May 30, 2023 10:03

Good time to own Nvidia stock?

Good time to own Nvidia stock?
$NVIDIA (NVDA.US)$ shares surged 25% to at an all-time high after it said a surge in demand for its AI-focused semiconductors powered a first quarter earnings beat and a robust near-term outlook for what is now the world's most-valuable chipmaker with a market capitalisation of more than USD940 b.
Nvidia sees current quarter revenues of around USD11 b, compared with the Wall Street consensus of USD7.15 b, with a gross margin of around 70%. That likely equates to earnings in the region of USD2.04 per share, nearly double the Street's prior USD1.07 per share forecast for the quarter.
For the 3 months ending in Apr, Nvidia also blasted Street forecasts with a bottom line of USD1.09 per share on revenues of USD7.19 b, powered by record data centre sales of USD4.28 b, a 14% increase that Nvidia said was led by growing demand for generative AI and large language models using GPUs based on our NVIDIA Hopper and Ampere architectures".
Other chip stocks followed Nvidia's surge on the AI frenzy.
Nvidia's graphics chips are widely used for AI workloads and it's a prime beneficiary of AI. Nvidia's GPUs can also be used to mine cryptocurrencies. Nvidia rallied more than 170% this year over the AI hype. This happened despite tumbling revenue and profit in the latest quarter, driven by crashing demand for PCs and the end of the cryptocurrency bubble. Nvidia's high-margin gaming segment has seen sales fall off a cliff in its previous 3 reported quarters. Gaming revenue declines of as much as 51% completely stalled Nvidia's growth engine in fiscal 2023.
AI will almost certainly prove to be a transformative technology, but AI may be overhyped now. The internet was transformative, and it still produced the mother of all bubbles in 2000. Internet was overhyped and the dot-com bubble burst in 2000. Although AI has the potential to be a long-term game changer for Nvidia, history suggests the current AI hype will eventually fade. The AI bubble could also burst.
Price-to-sales and Price-to-earnings ratios, and Tech stocks outperformance
Nvidia is looking overvalued now in terms of the Price-to-sales and PE ratios. It trades at >30 times sales and >180 times PE, levels just before the Dot-com Bust in 2000. PE for fiscal 2024 earnings is still high at >70 times.
Having more than doubled this year driven higher by extremely optimistic expectations, a potential boom in AI-related sales may have already been priced in. Nvidia is about as expensive as it's ever been. If those expectations aren't met, the AI bubble could burst and the stock could be in for a correction.
Tech stocks have grossly outperformed the S&P 500 this year because of the AI boom and the banking crisis. This again mirrored the outperformance before the Dot-com Bust.
More details below.
Ten-year return of stocks
Fig. 2. Ten-year return of stocks.
Fig. 2. Ten-year return of stocks.
The above figure shows that over the last 10 years, Nvidia's shares have risen more than 10,000%, the best performance of any company in the S&P 500 over that period. Tesla is a distant 2nd at 2,880%. But if you take its peak in Nov 2021 into account, Tesla was up 19,000% over the previous decade. It subsequently dropped 65% in 2022. This means that a stock which surged strongly over a 10-year period will also suffer a big correction.
The stock may join the trillion-dollar-market-cap club of which the current members are just Apple, Microsoft and Amazon. But the membership may be brief as the AI bubble may burst. Nvidia Q2 results may be strong on good AI data centre GPU sales, but the price may already have factored in. The other chip stocks may also fall with Nvidia. So investors should be cautious in owning chip stocks.
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