Avoid NVIDIA Corporation Stock Until After Tomorrow’s Earnings Results
In a recent article on NVIDIA Corporation (NASDAQ:NVDA), I warned of the dangers of the herd mentality. This mentality will be put to the test when Nvidia reports earnings on Nov. 9. Investors have driven up the NVDA stock price almost 17% in the last month.
However, given an increasing price-to-earnings (PE) ratio and new competitive threats, investors should stay away from NVDA stock pending the earnings report tomorrow.
Nobody can dispute that NVDA stock has experienced an awakening. Rarely does one see a 12-fold increase in the value of an S&P 500 Index stock in three years. However, NVDA did just that with a run from below $17 in October 2014 to almost $210 today. The advances made in gaming, as well as an entrance into data centers and self-driving vehicles, have put competitors on notice.
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Rivals are Joining Forces Against NVDA
Intel Corporation (NASDAQ:INTC) and Advanced Micro Devices, Inc. (NASDAQ:AMD), once bitter rivals themselves, have teamed up to produce a high-performance laptop chip. This chip will combine an Intel core processor with an AMD graphics unit. This alliance serves as tacit proof that NVDA is now the primary rival of both firms. While Nvidia has somewhat diversified away from gaming, it still accounts for about 50% of its revenue. Nvidia also grew its gaming revenue about 50% from the same quarter last year.
It’s partly because of this earnings growth that the consensus earnings per share (EPS) forecast for Q3 currently stands at 94 cents per share. NVDA stock has beaten estimates for the last few quarters. Hence, most investors will assume earnings are going to be higher.
NVDA Stock Holders Not Easily Impressed
Still, stock holders are not necessarily impressed by NVDA news of an earnings beat. After announcing Q2 earnings in August, the shares fell 10% in two days, though it bounced back soon after. Now, NVDA stock gained more than 23% in the last three months. The stock followed the same pattern in the previous quarters as well.
If history serves as an indicator, it’s reasonable to assume the stock will again sell off on the news. The real question will be what happens afterward? Will the growth pattern of the next three months resume or will it fall? The stock’s appreciation has brought it to a PE ratio just over 60.
To be sure, companies such as Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX) have higher multiples. Still, NVDA’s PE is approaching a level that that cannot be justified by fundamentals as it is three times the average for the S&P 500. While a number that big remains possible, no professional can credibly guarantee that happening. Moreover, if this Intel/AMD chip poses a serious challenge, it could slow that revenue growth and narrow the moat of NVDA stock.
Final Thoughts on NVDA Stock
Although Nvidia has enjoyed a growth rate that’s the envy of the market, investors should approach NVDA stock cautiously going into this week’s earnings report. The company has placed itself at the cutting edge of the latest technology on many fronts. However, multiples are increasing, and competing firms have started responding to Nvidia’s competitive challenge.
NVDA stock also has a history of running up, then selling off on earnings. Once the likely selloff occurs, prospective buyers will have to decide if the price will march higher, or if it’s going to pause. Given the high PE and the increasing competition, investors may want to wait before hopping aboard the NVDA train.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
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