Nvidia (NASDAQ: NVDA) posted a cracking set of fourth-quarter results last Wednesday (25 February), but the stock nosedived. We saw revenue climb 20% from Q3, with record full-year revenue up 65% to a stunning $215.9bn.
And yet shareholders weren’t happy, it seems. Over the next two days, Nvidia stock fell 9.4%.
Is growth beyond their wildest dreams simply not good enough for Nvidia investors? Or perhaps they just stepped back a bit and realised they’d pushed the market cap way above $4.3trn? And that maybe this AI thing might be looking just a bit bubbly?
Fair value?
Looking at the current valuation, it’s not at all obvious that Nvidia is overvalued. A trailing price-to-earnings (P/E) ratio of 38 isn’t that high by NASDAQ tech stock standards. And a forecast multiple of 22, dropping as low as 14 just three years later? Well, for the world’s leading AI chip company, that might even make it look like a steal.
Maybe these so-called hyperscalers really are piling too much money into AI too fast. And maybe some of the startups actually might go bust before they figure out how to make any profits. But that’s not Nvidia’s problem. Nvidia is making stacks of profit right now. And it’s building up a huge mountain of cash too.
Oh, but wait… Those forecasts are based on Nvidia’s earnings per share multiplying 2.6 times between these latest earnings and 2029. And for that to happen, wouldn’t we need all this massive AI spending to keep on accelerating in the next few years? At a time when a good few are already standing back and wondering if it might have gone a bit far already?
Beware of forecasts
It’s all very well looking at forecasts and pronouncing the stocks we’re looking at as must-buy bargains based on meteoric future growth predictions. But it might not make much sense if all the analysts’ thoughts are on a different planet. After all, broker forecasts reflect current investing sentiment — they don’t seek to change it.
I’ll tell you one person who appears to see no problem with sky-high growth predictions, though. It’s the man at the helm, Jensen Huang. He inspired a recent Bloomberg headline: “Nvidia CEO says AI capital spending is appropriate, sustainable.”
But then he’s likely to say that, isn’t he? He’s hardly going to suggest, ‘This AI spend is all a bit silly, but we’ll take the cash while it’s going’.
If fears of an AI bubble prove correct, those Nvidia forecasts could turn out to be pie in the sky. And today’s mooted valuations could be meaningless.
So avoid, or what?
Am I suggesting investors should avoid Nvidia, then? Not at all, no. I’m just saying I’ll avoid it myself, as I haven’t a clue who’s right about future AI spend. Investors who think Jensen Huang might know better than me (and, well, I admit there’s a chance of that…) could do well to consider buying after this latest fall.
