Nvidia - Priced for Perfection

$NVIDIA Corp(NVDA)$ , a market leader in semiconductor, is scheduled to release its earnings soon, prompting investors to re-assess their positions as its price has exploded more than 100% since bottoming in October last year. 

With price exhibiting gravity-defying strong performance in recent months, evaluating whether to sell Nvidia before the earnings announcement may be a prudent move for investors who are vested only in the recent rally. There are multiple factors and risks to consider influencing this decision.

Market Leader Position

In the recent years, Nvidia has solidified its leadership position in the semiconductor industry with its cutting-edge graphics processing units (GPUs) and advancements in AI technologies. Nvidia’s GPU are extensively used in various AI applications across industry, from autonomous vehicles to robotics and healthcare analytics. The GPUs also power AI applications in data centres, supporting high performance and complex AI workloads.

With the recent rapid advancements in AI (as evident in Microsoft’s Co-pilot, Google’s Bard etc.), the demand for AI therefore supporting hardware will continue to exhibit robust/exponential growth. Let’s also not forget that Nvidia has a comprehensive software platform that provides developers with the necessary tools to accelerate AI development. It is without doubt that Nvidia remains at the forefront of AI innovation, and it is poised to benefit from the continued growth of AI technology.

Extremely Pricey Valuation

While Nvidia has robust growth and profitability potential, it is imperative to note that Nvidia is extremely overbought and overvalued. With P/S ratio at 29 and P/E ratio at 179, Nvidia is certainly costly and one of the most expensive large cap companies. In comparison, the average P/S and P/E ratio for the semiconductor industry are 7 and 28 respectively. Even Microsoft, another tech giant with strong innovation in AI, only has a P/S ratio of 11 and P/E ratio of 33.

Danger of Significant Correction

With the extraordinary rally in the recent months, expectations for the upcoming earnings are incredibly high and there will be little to no margin for error. 

With a slowing economy (particularly cyclical nature of semiconductor), Nvidia's gaming GPU segment may continue to struggle as it faces the challenge of a “crypto winter”. Furthermore, it is speculated that the data center revenue growth may exhibit slower growth than anticipated, which can be a negative catalyst to its stock price.

With RSI above 70 and way above its 100-day and 200-day MA, it implies that Nvidia is getting overbought. Overall, the fundamental backdrop appears to be challenging for Nvidia. 

If it misses estimates or provides guidance below expectations, Nvidia may experience a siGnificant correction. It is hard to predict whether Nvidia’s rich valuation can be sustained with the upcoming earnings report. Investors who have bought in the recent rally (instead of the Oct lows) may wish to exercise more caution.

Will the sentiments sour quickly and result in a pullback or will Jensen Huang be able to pull off another spectacular wonder at the announcement? Happy to hear your thoughts on Nvidia!

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