To The Moon

Summary

• Nvidia Corporation's growth is slowing, with revenue projections indicating another significant decrease in quarterly growth.
• Delays in the release of new Blackwell chips could impact growth prospects and the stock valuation if management confirms.
• Hedge fund Elliott Investment Management has labeled Nvidia as a “bubble” with overhyped technology, raising concerns about future demand and growth potential.
• Nvidia's commitment to buybacks over R&D and equipment shows me a focus on stock price over new initiatives.

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Market heavyweight Nvidia Corporation (NASDAQ:NVDA) releases its second-quarter 2025 earnings post-market on Wednesday. In this article, I will discuss why I am selling the stock ahead of that update.

Investors must accept that growth is slowing

The first basis of my bearish call is that the company's blockbuster growth is slowing down.

NVIDIA Financials (Seeking Alpha, Author)

The company's revenue has slowed from quarterly growth of 88% in July 2023 to 18% in the most recent quarter. In the company's Q1 2025 earnings release, management projected a Q2 return of $28 billion. That would mark another slowdown to 8% quarterly growth.

To put that into perspective, rival chipmaker Advanced Micro Devices (AMD) currently has quarterly sales growth of 8.8% and a valuation of around 10x price/sales. Meanwhile, Nvidia currently has a price/sales metric of 25x.

I understand there is an element of apples vs. oranges with these companies, but valuation is why we are here.

Gross profit and net income are high at the company, but the gap to revenues is closing fast and are now more closely aligned.

Blackwell delays will affect growth prospects

Many analysts are trying to play down the delays to the company's new Blackwell chips.

A report from The Information said that the new products were "delayed by three months or more due to design flaws." That extended a bout of bearishness in Nvidia stock to lows near $90, but a rebound of around 40% since then has boosted investor hopes. I would see it as a golden opportunity to cut stake sizes in the company, or exit.

The Information added:

It is highly unusual to uncover significant design flaws right before mass production. Chip designers typically work with chip makers like TSMC to conduct multiple production test runs and simulations to ensure the viability of the product and a smooth manufacturing process before taking large orders from customers. It's also uncommon for TSMC, the world's largest chipmaker, to halt its production lines and go back to the drawing board with a high-profile product that's so close to mass production, according to two TSMC employees.

In my opinion, it is possible that Nvidia, pressured by the stock price surge, is rushing to develop new products to please Wall Street analysts.

Regardless, the report cited two suppliers close to Nvidia, saying that the new GB200s will initially ship in Q4, and are expected to see an increase in production volume in Q1. That was actually the original release timeline, so it is interesting that the new chips are said to be on track with the late design flaw.

After this recent development, management will update investors in the upcoming Q2 earnings release, and it is an unknown that could hurt the growth trajectory of the stock. That puts a further dent in the current valuation of the stock. It is also a potential future headwind for the stock if an aggressive timeline for chip development leads to a product recall.

UBS analysts said recently that Blackwell shipments would be delayed by "four to six weeks at most (putting them at the very end of January 2025)." That led to a rebound in the company's stock, and analysts at the investment bank said that increased appetite for H200 chips could fill the gap until then.

The other issue here is that customers switching their allegiance to the new chips will do so at their current rate of demand.

Elliott rings the bell on the AI bubble

Around the time that the Blackwell delay was announced, hedge fund Elliott Investment Management delivered a bearish assessment of the chipmaker. The FT cited a client letter from the $70 billion fund that said Nvidia is a "bubble," and the technology driving the share price is "overhyped."

That letter came out when the company was 40% lower than the current price.

Elliott analysts are "skeptical" that Big Tech will keep buying the company's GPUs at the same volume.

Many of the planned uses for generative AI are "never going to be cost-efficient, are never going to actually work right, will take up too much energy, or will prove to be untrustworthy," they added.

Big Tech has gone on a spending frenzy to soak up Nvidia's chips, but there is yet to be a commercially successful product in place.

"There are few real uses," it said, other than "summarizing notes of meetings, generating reports, and helping with computer coding," Elliott said.

Many companies were on a win-win with chip purchases. Any mention of AI led to a surge in a company's stock price over the last two years, and a ramp-up in AI spending led to a surge in the company's stock price.

In my opinion, chip spending is reminiscent of Meta Platforms' pivot and splurge on the metaverse. Mark Zuckerberg's vision for the virtual universe has cost the company more than $50 billion, and now he is touting AI as the future.

I believe Nvidia's sales will plateau further when Big Tech's AI projects meet their requirements for development and employee capability.

Other financial considerations

Another issue I have with Nvidia's growth valuation is that the company is not spending anything on research & development. R&D costs over the period I studied rose from $1.87 billion in April 2023 to $2.72 billion in the most recent quarter.

Cash from operations has risen over the same period from $2.9 billion to $15.3 billion, but Nvidia has chosen to spend on share buybacks. Repurchases in the previous two quarters were around $6 billion and highlights that the company's share price is more important than any new initiatives, in my opinion.

The company has a minimal dividend yield of 0.02%, which is smaller than the sector median of 1.44%. It is possible that management could announce special dividends, or ramp up its quarterly yield. However, that would be a further sign that returning cash to shareholders is the company's focus and that management is pinning its hopes on continued Big Tech chip spending.

The company's Q1 CFO commentary said they had "Purchase commitments and obligations for inventory and manufacturing capacity were $18.8 billion." That is equivalent to only one quarter of revenue.

Nvidia has only added $500 million to its plant, property, and equipment over the last four quarters. That seems odd for a company that is struggling to meet demand and sees long-term growth for its products.

Downside risks to my bearish call

I believe the initial risk to my investment call is the coming earnings release. Elliott Management said weak earnings could "break the spell" on Nvidia, but the company's strong net income has the potential to create another earnings per share beat.

Nvidia EPS Beats (Nasdaq)

The company has surprised the market with EPS expectations over the last four quarters, and although that metric is also slowing, an improvement on analysts' expectations would be a positive headline.

Analysts have also guided for revenue to come in just ahead of management's $28 billion projection. Any beat on that figure would also boost investor hopes while ignoring the growth trajectory.

There are also options for an increased dividend and buybacks.

Conclusion

Nvidia is still an impressive company with growth potential in areas such as autonomous driving. However, I believe that the company is overvalued at current prices and investors run the risk of holding the bag for an earnings shock. Revenue is slowing at the firm, and the previous gap in net income is closing. There is still the potential for an earnings per share beat in the coming quarter, but those surprises are also reducing in size. With the company's demand (one-quarter of commitments) outpacing supply, there is limited opportunity to ramp up production. The Blackwell delay is another headwind to growth and means that any large upside could be limited into the second quarter of 2025 (FY 2026). Investors are also playing with fire, as Big Tech's pet project has yet to produce a significant breakthrough for a mass-market product. That could mean a slowdown in spending over the coming year as they hit a plateau in their AI building capabilities.