Nvidia: 🔥stock but beware...🪤
this is a warning.
Since its 1Q23 earnings, $NVDA is up 27.5% and its market cap has grown by more than $184B! Sound big?
Yes, that's larger than Intel:
If this trend continues, Nvidia could become the newly minted member of the prestigious trillion-dollar market cap companies which include Apple, Microsoft, Alphabet, and Amazon!
🫧 or 📈?
I’d say, don’t jump onto this hot stock just yet.
Let’s explore Nvidia’s latest run:
🥳Why did Nvidia’s price pop?
Nvidia did well in its latest earnings;
✅beat EPS expectations by a good 18.8%
✅beat Revenue expectations by 10.3%
NVDA even added cherry to the top with the announcement of a blowout guidance:
🎯2Q24 forecast revenue ~$11B (Wall Street anticipated $7.2B)
🎯2Q24 forecast EPS of $1.97 (Wall Street anticipated $1.06)
The projected total revenue of $11 billion represents a staggering 64% increase compared to the same period last year and a substantial 53% growth compared to the latest quarter. This exceptional projection is what triggered Nvidia's significant 25% gain. It clearly indicates that the AI craze has resulted in tangible and substantial growth for Nvidia.
Finbite Insights on Nvidia
No wonder Nvidia’s stock price popped:
😐But wait, it isn’t that impressive under the hood
Let’s take a closer look at Nvidia’s 1Q24 earnings:
Due to the increase demand for cloud processing and generative AI applications, Nvidia saw strong growth in its Data Center segment.
While its Auto segment grew significantly as well, Gaming and other segments continue to hold back Nvidia’s overall growth.
Although Nvidia did beat earning expectations, its total revenue had declined 13% year-on-year.
So why the bull run?!
🤖The AI Boom
Since the launch of ChatGPT, artificial intelligence (AI) has become the key focus of tech companies:
What is Nvidia’s role in the AI gold rush?
If AI is the gold, Nvidia is selling the shovels to the gold diggers.
Finbite Insights on why you shouldn’t short Nvidia
Neural network model training is a key process in AI and it is highly resource intensive; multiple computations have to be processed at the same time.
Graphic Processing Units (GPUs) have become the foundation of AI, as it allows for such computations to be done.
And…
🏆Nvidia’s GPUs are currently the Best In Class
Nvidia’s A100 chips are the best in class currently.
In fact, Nvidia’s hardware powers most if not all of deep learning artificial intelligence:
🫧The AI Hype
AI is a really powerful technology that can change how we do things like work, make art, and enjoy music and videos. We can already see it being used in these areas.
That said, it's important to know that there's a lot of excitement and talk about AI right now. Many companies are jumping on the AI trend because they think it's the next big thing.
This has caused a big demand for Nvidia's GPUs, which are important for AI. While Nvidia will continue to benefit from the ongoing AI gold rush…
However, how many of the 100M ChatGPT users are still active users?
How long will the AI hype last?
No one knows.
The huge demand for Nvidia's GPUs might not last forever.
💸Nvidia is vastly overpriced
I know I will get flaked for saying this.
Nvidia is currently the sixth biggest company in the world! That means it's even bigger than famous companies like Berkshire Hathaway, Meta Platforms, Tesla, TSMC, and others.
But when you look at how much money it actually makes, Nvidia’s revenue is ranked 432nd in the world.
This means that compared to other companies, Nvidia's Price-to-Sales ratio is higher. (At the point of writing, Nvidia’s PS ratio stands at 37.56.) That's just a fancy way of saying that the price of Nvidia's stock is higher compared to how much money the company makes.
In terms of earnings, Nvidia is ranked 355th.
Those are some pretty huge discrepancy. And I would wager to say that most of it is due to the AI hype.
Now, I’m not trying to throw shade on Nvidia. It is a great business. But even great businesses are not spared in recessions or negative macro economy events.
If you don’t have a position in Nvidia now, it would be prudent to wait for its valuation to normalize instead of jumping in.
Great Write-up!