Nvidia (NASDAQ:NVDA) shares have traded at high multiples for some time. But there are signs the stock market’s starting to get uneasy at artificial intelligence (AI) valuations.
The company’s set to report Q3 earnings this evening (19 November). And it might be a good time for investors who are well up on the stock to think about banking some profits.
Short Nvidia?
There’s no way I’m going to short Nvidia ahead of the results. I’ll leave that for people like Michael Burry, who are much braver than me and have a strong conviction on what they’re doing.
Making short-term share price predictions is very risky. It might be doable for an outfit with the vast computing power of Renaissance Technologies, but for the likes of me – no.
To some extent, that’s been Burry’s problem. Even in the 2008 crisis, he was right about what was going on, but he found it hard to predict when it would show up in markets.
Given this, predicting what the stock market will make of Nvidia’s impending results looks risky. But that’s not the only reason for investors to consider taking some profits beforehand.
Growth
Investors have been saying for a while that Nvidia’s share price reflects some big growth assumptions. And while they’ve been right, the company’s exceeded expectations.
Recently though, investors have started to become wary. The firm’s deal with OpenAI – a money-losing business – to deploy 10 gigawatts of AI infrastructure has attracted attention. The issue is that the deal coincides with a $100bn investment in the company from Nvidia. And that raises questions about how sustainable this kind of growth is.
A price-to-earnings (P/E) ratio of 54 implies sustained growth for a long time. But with customers struggling to finance deals, shareholders might want to reassess the situation.
Getting the timing right
It’s also worth noting that investors thinking about taking profits don’t necessarily have to get the timing exactly right. A good example is Zoom Communications. The stock got a huge boost during Covid-19 before falling away as things went mostly back to normal.
I’m not saying Nvidia’s the next Zoom, but there’s an important lesson here.
Shareholders who sold their Zoom stock in July 2020 missed out on a 100% gain when the stock peaked three months later. But over the long term, they avoided a 70% decline.
In other words, selling a stock might not be a bad idea even if it turns out that the share price has further to run. If the fundamentals are stretched, it can be a smart long-term move.
Money in the bank
Nvidia shareholders have done exceptionally well over the last few years. But my sense is that it might be time to think about putting some of that profit in the bank.
That’s not because I’m forecasting a drop after tonight’s earnings (so don’t give me credit if that happens). It’s because I think the firm is going to find it harder to keep the growth going.
Today’s prices still reflect some optimistic assumptions for the business. And with customers working harder than ever to finance deals, I think it’s starting to look risky.
