Nvidia (NVDA) recently announced its 3Q earnings amid a strong year. However, the company’s upcoming AMD and Intel competition, heavy multiple and lack of earnings growth compared to this multiple means that the company is overvalued. As a result, as we will see throughout this article, we expect its multiples to contract this.
Nvidia 3Q 2021 Financial results
Nvidia’s 3Q 2021 financial results were relatively respectable and showed decent growth across the company’s major business areas.
Nvidia Earnings – Nvidia Press Release
Nvidia’s 3Q 2021 revenue was just over $ 4.8 billion, an increase of 57% over 22% in QoQ. This was supported by the company’s new 3070/3080 GPU launch, the most important launch for several years for the company despite a highly competitive product from AMD (AMD). The company’s gross margin has remained at more than 60%, resulting in a net income of just over $ 1.3 billion
The company’s non-GAAP earnings are only minimally larger, as the company is not one that greatly reduces its GAAP earnings. However, despite continued strong earnings with massive growth, the company’s GAAP EPS is only ~ $ 10 / share on an annual basis. This would give the company a P / E ratio of more than 50x. That is more than 3 times the company’s historical P / E ratio before multiple inflation.
To be reasonably priced, Nvidia would need significant growth in an industry that is becoming more and more competitive. AMD’s new top-end GPUs are considered competitive with Nvidia’s GPUs. This is the first time in almost a decade. With customers increasingly focused on differentiating themselves from the company, it is undefined whether it will achieve this growth.
Nvidia ARM acquisition
Another unique feature of Nvidia is the company’s acquisition of ARM, a $ 40 billion acquisition.
Whether or not this acquisition is reviewed or not, antitrust issues remain incredibly important. The acquisition is promising and ARM is becoming increasingly popular, but the company is still being sold to Nvidia at a market value of more than 20. This means, despite the potential size of the acquisition, it will take a long time until it generates valuable cash flow for the shareholders.
Ultimately, the economic situation is what investors are betting on.
Nvidia Growth Potential
Those who invest in Nvidia need to justify the valuation, and the only fair way to justify the company’s valuation is by looking at its growth potential. Most of Nvidia’s revenue comes from “gaming” and “data center” companies, where its data center business is growing particularly fast.
Nvidia itself linked the GPU accelerator market to $ 30 billion in 2020 and $ 50 billion in 2023 several years ago, though a Seeking Alpha article here discussed how it was lunar estimates. More realistic estimates show that it will hit $ 50 billion in 2026. However, competition is expected to increase significantly as Intel now moves into the fray.
With Nvidia’s declining growth estimates and competition, the company is likely to see growth here, potentially even doubling revenue, but minimally long-term revenue growth potential.
Nvidia EPS Forecast – NASDAQ
Consensus forecasts are that Nvidia’s 2020 EPS should be ~ $ 8.1 / share, not much above its current EPS. This means trading with a> 50x P / E ratio for where it will be 2-3x years from now. The company can achieve long-term growth, but with 17% annual growth, this means that it will take roughly until the mid-2030s for Nvidia to achieve a reasonable valuation at the current share price.
It should be a sign of how overrated the company is. Based on this, we would not be investors in the company at this time. The company is a dangerous card due to the current high-flying technology market, although in our opinion it is worth selling your investment to capture the latest gains in the company’s stock price.
In our view, the dissertation risks around investing in Nvidia are based on how high-flying technology stocks have been recently. Lots of startups or medium-sized companies with “hip” technologies have seen their stock price rise. People chasing the next technology opportunity have caused Nvidia’s value to more than double this year.
This euphoria, which reminds us of the technology markets of the late 90s, is difficult to compete with. However, we recommend those who have been lucky enough to invest in Nvidia to sell their shares and gather the profits.
Nvidia has an impressive asset portfolio, and the company has continued to grow significantly. The company’s YoY improvements have supported its EPS growth. But in our opinion, the company is now overvalued and those who were lucky enough to invest had to sell their shares to collect their rewards.
In our view, it will take until the mid-2030s for the company to reach a fair value based on the current share price. Another way to look at it is that the company is highly overvalued based on its current price and is due to a multiple contraction. For this reason, we do not recommend investing in Nvidia.
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Disclosure: I am / we are long NVDA. I wrote this article myself and it expresses my own opinions. I do not receive compensation for it (except from Seeking Alpha). I have no business relationship with any company whose shares are mentioned in this article.