You Said Nvidia Is Overvalued But Its Share Price Keeps Rising

The AI fever has not subsided and it is translating to real dollars for Nvidia.

The eagerly awaited results of Nvidia has finally been announced and the results were truly exceptional.

Nvidia recorded a revenue of $13.51 billion, marking a 101% increase compared to the previous year. The net profit experienced an even more dramatic surge, skyrocketing to $6.19 billion from $656 million in the previous year, reflecting an astounding 854% growth!

This significant margin leap can be attributed to the shift in product composition, wherein data center graphics cards yield a superior gross margin compared to other products. Notably, the surge in demand for data center graphics cards, primarily for AI applications, is the cause of the increase in profitability.

Nvidia's gaming division is faring reasonably well with a 22% revenue surge compared to the previous year. The automotive segment also witnessed a 15% increase in revenue. However, the revenue for the Professional Visualization segment experienced a decline of 24%.

These segments have somewhat taken a back seat in significance, given the data center segment's ascendancy as Nvidia's primary driver for growth. This is the current story that investors love.

Displaying You Said Nvidia Is Ove...

The revenue projection for the upcoming quarter was even more astonishing. Nvidia projected an anticipated revenue of approximately $16 billion in the next quarter, a substantial increase compared to the estimated $12.61 billion, marking an impressive 170% surge from the same period in the previous year (or an 18% QoQ growth.) This signifies that the momentum of revenue growth is gaining pace!

Hence, Nvidia is undeniably showcasing exceptional results, and the story sounds like a fairy tale with a happily ever after ending. Traders have been amassing options in anticipation of the results. The quantity of active call options for Nvidia reached a record high. The majority of these trades were based on an 11% fluctuation by the week's end.

Displaying You Said Nvidia Is Ove...

Following the earnings announcement, Nvidia's stock price surged by 7% during after market hours. When combined with the 3% increase observed during trading hours, the total gain amounted to 10%, closely aligning with the 11% bullish projection.

Nvidia has surpassed the significant milestone of $500 per share, and it is currently the leading performer among S&P 500 component stocks with an impressive 217% gain year-to-date. Additionally, the company has attained a market capitalization of one trillion dollars this year, securing its position among the elite "Magnificent 7" club. Nothing seems to go wrong with Nvidia.

Numerous investors are likely drawn in by the story and feel enticed to participate, even though they likely acknowledge that Nvidia is overvalued. The reality remains that the price continued to rise despite its overvaluation, and there exists a plethora of compelling data showcasing the company's robust performance. I find it bubbly when most investors start to pay too much attention to a stock and only see the good things. It is probably a sign that a lot of that optimism has been priced in.

To provide you some sense of the extent of overvaluation: The average Price-to-Sales (PS) ratio for the Magnificent 7, excluding Nvidia, hovers at approximately 7x. In stark contrast, Nvidia's PS ratio stands at 45x. If we assume that Nvidia can sustain a pattern of doubling its revenue year over year, it would need to replicate this growth consecutively for another 8 quarters without the accompanying increase in share price. This would then align its valuation with that of the Magnificent 7. It sounds unsustainable to me.

Yes, an overvalued stock can still go much higher. But no one stock goes up in a straight line without any correction. Eventually, there will come a point when the share price undergoes a decline, and predicting the exact timing to exit prior to this occurrence can be quite challenging. Individuals who entered the market early and have held their positions certainly deserve credit. However, for those contemplating entry at this juncture, the level of risk is notably elevated.

I like the company. But I don't like the price and the hype.