Nvidia (NVDA) recently announced its 3Q earnings on the back of a strong year. The company’s upcoming AMD and Intel competition, heavy multiple growth and weak profit growth compared to this multiple result, means the company is overvalued. As a result, as we will see throughout the article, we expect its multipliers to agree to correct this.
Nvidia 3Q 2021 Financial Results
Nvidia’s financial results for the third quarter of 2021 were well respected, showing decent growth in the company’s main business lines.
Nvidia Revenue – Nvidia Press Release
Nvidia’s revenue for the third quarter of 2021 is just over $ 4.8 billion, up 57 percent year-over-year from 22 percent for the quarter. This was supported by the new launch of the company’s 3070/3080 GPU, the most important launch in several years for the company, despite AMD’s strong competitive product (AMD). The company’s gross margin remains at over 60%, resulting in a net profit of just over $ 1.3 billion
The company’s profits outside of GAAP are only minimally higher, as the company is not the one that greatly reduces its GAAP revenues. Despite continued strong earnings, with huge growth, the company’s GAAP EPS is only ~ $ 10 / share per year. This would give the company a P / E ratio of more than 50 times. This is more than 3 times the historical P / E ratio of the company before repeated inflation.
To be fair, Nvidia will need significant growth in an increasingly competitive industry. AMD’s new high-end GPUs are considered competitive with Nvidia’s GPUs. This is the first time in nearly a decade. With customers increasingly focusing on their separation from the company, whether it will achieve this growth is not certain.
Acquisition of Nvidia ARM
Another unique move by Nvidia is the acquisition of ARM by the company, an acquisition worth $ 40 billion.
Whether this acquisition will pass or not remains to be seen, antitrust concerns remain extremely significant. The acquisition is promising and ARM is becoming increasingly popular, but the company is still being sold to Nvidia at a market capitalization to sales ratio of over 20. This means that despite the potential size of the acquisition, it will be a long time to generate valuable cash flow. for shareholders.
Ultimately, financial condition is what investors bet on.
Nvidia’s growth potential
Investors in Nvidia need to justify the valuation, and the only fair way to justify the valuation of the company is by looking at the growth potential. Most of Nvidia’s revenue comes from its gaming and data center business, and its data center business is growing particularly fast.
Nvidia itself fixed the GPU accelerator market at $ 30 billion in 2020 and $ 50 billion in 2023 a few years ago, although a Seeking Alpha article here discusses how these are lunar estimates. More realistic forecasts show that it will reach $ 50 billion by 2026. However, competition is expected to increase significantly, with Intel already fighting.
As Nvidia’s growth forecasts lag behind competition, the company is likely to see growth here, potentially even doubling revenue, but minimal long-term revenue growth potential.
Forecast for Nvidia EPS – NASDAQ
The consensus estimates are that Nvidia’s EPS for 2020 will be ~ $ 8.1 / share, not much above the current EPS. This means that it is trading at a ratio> 50x P / E, where it will be 2-3x years later. The company may achieve longer-term growth, but with 17% growth on an annual basis, this means that it will take approximately until the mid-2030s until Nvidia achieves a fair assessment of the current share price.
This should be indicative of how overvalued the company is. Based on this, we would not be investors in the company at the moment. The company is a dangerous move because of the current high-tech market, although we think it’s worth selling your investment to capture recent gains in the company’s stock price.
In our opinion, the thesis about the risks surrounding investing in Nvidia is based on how high-tech technology stocks have been recently. Many start-ups or medium-sized companies with “hip” technology have noticed an increase in their share price. People chasing the next technology opportunity have more than doubled Nvidia’s value this year.
With this euphoria, which reminds us of the technology markets of the late 1990s, it is difficult to compete. However, we recommend those who have been lucky enough to invest in Nvidia, sell their shares and reap the rewards.
Nvidia has an impressive portfolio of assets and the company continues to grow significantly. The company’s improvements for the year supported the growth of EPS. However, in our opinion, the company is already overvalued and those who have been lucky enough to invest must sell their shares to collect their rewards.
We believe it will take until the mid-2030s for the company to reach fair value based on its current share price. Another way to look at this is that the company is greatly overvalued based on its current price and due to repeated contractions. For this reason, we do not recommend investing in Nvidia.
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Disclosure: I am / we have been NVDA for a long time. I wrote this article myself and it expresses my own opinions. I do not receive compensation for this (except from Seeking Alpha). I have no business relationship with any of the companies whose shares are mentioned in this article.