Nvidia's Soaring Success: Bubble Trouble on the Horizon?

Disclosure: The author holds a significant short position in NVDA. Please read additional disclaimers at the end of this article.

In the realm of high-flying tech stocks, few have captured investors' imaginations quite like Nvidia Corporation ($NVDA). Just a year ago, shares of the graphics processing unit (GPU) giant were trading at around $185, but today, they have skyrocketed to an astonishing $362. However, a closer look behind the scenes reveals some alarming trends. Despite a meteoric rise in stock price, Nvidia has experienced a decline in both sales and earnings over the past year, marking a troubling contrast to its soaring valuation. Exactly a year back, on May 25 2022, NVDA reported quarterly earnings per share of $1.36 and revenue of $8.29Bn. Yesterday, it reported EPS of $1.09 and revenue of $7.19Bn. This reflects revenue being down 12% and earnings being down almost 20% Y-O-Y. Yet NVDA has soared 26% intraday on these results reaching a price of nearly 380$ and a market cap of nearly 1 trillion USD.

To put things into perspective, consider this astounding statistic: Nvidia's recent intraday gain alone in terms of market cap surpasses the cumulative revenue generated by the company since its inception. The company's market capitalization swelled by a staggering $200 billion today, surpassing the combined market caps of prominent S&P 500 companies like Cisco, Thermo Fisher, Accenture, AMD, T-Mobile, Adobe, Nike, Disney, and Netflix. With these alarming figures in mind, examining whether Nvidia's remarkable growth is a sign of brilliance or a bubble poised to burst is imperative.

Let's get into comparables analysis:

P/E:

Pre Q1 2024 earnings -

Forward - 92x

Trailing - 173x

Post Q1 2024 earnings -

Forward - 114x

Trailing - 215x

P/S:

Pre Q1 2024 earnings -

Forward - 25x

Trailing - 28x

Post Q1 2024 earnings -

Forward - 31x

Trailing - 34x

Pre Q1 2024 earnings -

P/B - 34x

EV/Revenue is at 28x and EV/EBITDA is at 105x.

Post Q1 2024 earnings -

P/B - 42x

EV/Revenue is at 36x and EV/EBITDA is at 140x.

But looking at these metrics by itself never gives a full picture, so let's compare it to Nvidia's peers and industry. To be conservative and facilitate unbiased comparisons, I am going to look at the metrics pre-earnings to eliminate the obvious overreaction of Nvidia's price intraday today and also because many of its peers have not reported the latest quarterly earnings yet.

Price to Sales Ratio vs Peers

NVDA is expensive based on its Price-To-Sales Ratio (28x) compared to the peer average (6.6x).

Price to Sales Ratio vs Industry

Nvidia's valuation is in a league of its own here.

Share Price vs Fair Value

A 2-stage FCFE model assuming perpetual growth post the terminal year has Nvidia's fair value at $95.88 which is similar to the fair value derived from average peer trading multiples as well. This fair value suggests an overvaluation of nearly 300%. Note that the risk-free rate used for this model has been conservatively taken as a 5-year average of long-dated government bond yields at 2.10%. Taking current yields would have pushed this fair value down even further.

Here are some exuberant analyst price target updates post recent earnings,

- NVDA: Baird Upgrades to Outperform from Neutral - PT $475 (from $300)

- NVDA: Rosenblatt Raises Target Price To $600 From $320

? NVDA: KeyBanc Raises Target Price To $500 From $375

- NVDA: JP Morgan Raises Target Price To $500 From $250

? NVDA: Barclays Raises Target Price To $500 From $275

? NVDA: Evercore ISI Raises Target Price To $500 From $320

? NVDA: UBS Raises Target Price To $475 from $315

? NVDA: Bernstein Raises Target Price To $475 from $300

- NVDA: Jefferies Raises Target Price To $472 From $300

- NVDA: Morgan Stanley Raises Target Price To $450 from $304

? NVDA: Raymond James Raises Target Price To $450 from $290

? NVDA: BofA Securities Raises Target Price To $450 from $340

- NVDA: BMO Capital Raises Target Price To $450 From $350

? NVDA: Wells Fargo Raises Target Price To $450 From $320

? NVDA: Susquehanna Raises Target Price To $450 From $350

- NVDA: Piper Sandler Raises Target Price To $440 From $300

- NVDA: Goldman Sachs Raises Target Price To $440 From $375

? NVDA: Citi Raises Target Price To $420 from $363

- NVDA: Oppenheimer Raises Target Price To $420 From $350

- NVDA: Deutsche Bank Raises Target Price To $390 From $220

? NVDA: Stifel Raises Target Price To $370 from $300

And all of this comes at a time when the outperformance in markets is at historical concentration levels with macroeconomic factors like the debt ceiling crises looming on our heads and the job market still running very hot.

The next price support of NVDA looms at around 312$ with 200 SMA being around 200$ levels.

Given all these facts and numbers, I will let you make your own conclusions. The remarkable ascent of Nvidia's stock price combined with the company's declining sales and earnings raises valid concerns about the existence of a bubble. While Nvidia has undoubtedly made significant contributions to the tech industry, investors must exercise caution and critically assess the sustainability of its current trajectory. Only time will tell whether Nvidia's astonishing growth is a reflection of brilliance or if it's a bubble ready to burst, leaving those caught in its wake to grapple with the aftermath. As the market remains captivated by Nvidia's mesmerizing ascent, prudent investors should proceed with caution and carefully evaluate the underlying fundamentals to make informed decisions in this high-stakes game of speculation.

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