Stock Market

Is NVDA Stock Already Overheated or Just Getting Started?

Nvidia (NASDAQ:NVDA) has seen incredible growth following its earnings report on May 24, with Nvidia stock surging around 30% in roughly one week.

However, prior to this announcement, Nvidia has remained on a tear. On a year-to-date basis, this is a stock that’s surged approximately 175%, nearly tripling in short order.

What’s truly incredible about this move is Nvidia’s sheer size. Having broken through the $1 trillion valuation mark, these moves aren’t really supposed to happen for the largest companies out there. The best most investors can hope for with such stocks is a steady grind higher.

However, Nvidia’s incredible surge prompts many investors to stop and think. For those who have enjoyed the gains provided by this chip maker, now may be the time to remain cautious, and consider some risk management in taking some cream off the top.

Here’s why I think right now may be the right time for investors to consider trimming exposure to Nvidia stock.

NVDA Nvidia  $389.19

Recently on Nvidia

Nvidia’s stock rally has been remarkable, fueled by the rise of AI models like ChatGPT. Investors are optimistic that Nvidia’s graphics cards will play a crucial role in the upcoming technological revolution.

Nvidia is positioned as a top investment choice for those seeking exposure to the rapid growth of artificial intelligence. With industries like education, healthcare, logistics, and finance being disrupted by AI, there is a strong demand for chips, making Nvidia a promising opportunity for investors.

Despite the promising future, the current challenge for Nvidia lies in the early stage of the AI transformation.

It will take time before the company sees a significant increase in sales and profits. In the meantime, Nvidia must address the slowdown in gaming and data center demand, which are its core revenue sources.

Guidance Report

Analysts anticipated Nvidia to report earnings per share of $0.92 on $6.5 billion in revenue for Q1 2023. These figures reflected a 32% decrease in earnings and a 21% drop in revenue compared to the same quarter last year.

Recently, NVIDIA announced Q1 2023 revenue of $7.19 billion, a 13% year-over-year decrease but a 19% increase from the previous quarter. GAAP earnings per share were $0.82, up 28% year-over-year and 44% quarter-over-quarter.

Non-GAAP earnings per share were $1.09, down 20% year-over-year but up 24% quarter-over-quarter.

Investors acknowledge the challenging phase ahead for the company but remain optimistic about future performance. Therefore, the focus will primarily be on the guidance provided by company executives for the upcoming quarters and beyond.

If management reaffirms or improves the outlook for aggressive earnings growth in the coming months, it could overshadow all other factors, according to analyst estimates.

Investors Are Concerned

Nvidia shares face valuation concerns, trading at a high multiple of roughly 35-times sales and 84-times forward earnings, raising questions about its sustainability despite promising growth prospects.

As leading tech companies incorporate generative AI into their services, the demand for Nvidia’s chips, specifically the A100, is soaring. Microsoft alone uses tens of thousands of these chips, each priced at around $10,000, to fuel innovations like ChatGPT.

Nvidia’s stock faces vulnerability as the high expectations for exponential profit growth have already been factored in, leaving little room for error. The company would need to surpass already lofty expectations for the stock to continue its upward trajectory.

Is Now the Time to Load Up on NVDA Stock?

The dependency on Nvidia is so widespread that Big Tech companies have been working on developing their own competing chips, much in the same way as Apple (NASDAQ:AAPL) spent years developing its own chips so it could avoid having to rely on — and pay — other companies to outfit its devices.

Google has built its own “Tensor Processing Units” for several years, and both Microsoft and Amazon have programs to design their own as well.

Those alternatives won’t be enough for the biggest companies, Nvdia will remain dominant. I like this stock over the long-term, but I also think there’s a time to step away from the table.

For those who are up big, play with the house’s money. But I don’t know that now is the right time to add more risk in a name like this until the market settles down and provides a more attractive entry point.

On the date of publication, Chris MacDonald has a position in AAPL. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

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