Nvidia’s stock got a massive boost after crushing earnings and raising guidance. That could be enough to propel it into the trillion-dollar club alongside Apple, Amazon, Alphabet, and Microsoft.
Investor euphoria is based on the company’s role in the AI frenzy, the rise of ChatGPT, and its growing data center business. But there are warning signs.
Shares have fallen 10% since August 31
Nvidia’s stock has swooned in recent weeks as equities have struggled across the board. In particular, the Nasdaq Composite NDX has fallen 26% from its recent peak to trade at what CFRA’s Sam Stovall calls “a statistical extreme.” And it may not be over yet.
The semiconductor giant’s stock has soared over the past year on artificial intelligence (AI) mania. Nvidia’s GPU chips are used in computer graphics, machine learning, and autonomous driving. Its latest products include data center processors and deep learning software. The company’s products have been embraced by consumers, game developers, and enterprise companies alike.
But Nvidia’s stock has also become a favorite among short sellers. Investors who short sell a stock are betting that the price will decline. When they’re right, they can make money by covering their positions at a lower price. Short interest data is published by NASDAQ, and Nvidia’s has shown an increase in short interest this month.
NVDA shares jumped on Wednesday after the company reported better-than-expected earnings and forecast strong revenue growth in the third quarter. Other chip and AI stocks like SharkNinja, Advanced Micro Devices, Splunk, and Snowflake also rose in after-hours trading as investors cheered upbeat news from Nvidia.
But the rally could be short-lived, and that’s because Nvidia has a lot of expectations to live up to. Its market cap is currently north of $200 billion, and its P/E ratio stands at more than 220. That’s rich even by tech-stock standards.
For Nvidia to deliver on its rosy outlook, it will need to continue growing quickly. And if it doesn’t, the stock will likely fall further.
It’s important to remember that analysts and short sellers can be wrong, so it’s always wise to conduct your own due diligence before investing in any stock. And don’t invest more than you can afford to lose.
If you’re looking for an investment with more potential, check out The Motley Fool’s Top 10 Stocks for 2023. Our analyst team has uncovered a few names that should outperform the market in the years to come.
Nvidia’s 2023 run has flamed out
The 2023 rally in tech stocks was a head-turner, and (NVDA) has been leading the pack. Its stock has soared nearly 180% this year, besting every other member of the S&P 500 in the process. Its meteoric rise is a result of the company’s decade-long head start in the kind of artificial intelligence chips now coveted by companies across Silicon Valley.
But despite the huge upside, investors must remain vigilant. The company still faces risks that could limit its long-term growth potential, including competition from rivals like Intel and AMD, as well as supply issues that can depress revenue. Nvidia’s high valuation also puts the company at risk if it fails to execute perfectly on earnings projections.
Nvidia’s decision to buy back $25 billion worth of shares this week caught some investors off guard, especially since the company had already blown past expectations in its earnings report. But buying back shares reduces the number of outstanding shares, which can boost earnings per share – a key investor metric. The move is also a sign that Nvidia’s growth potential may have peaked and that much of its short-term performance is already priced into the stock.
Another risk is the potential for a slowdown in China, which is one of Nvidia’s biggest markets. The country’s slowing economy has sent shockwaves throughout the global economy, and it could weigh on Nvidia’s revenue growth in the coming quarters.
A third issue is the possibility that the market has over-priced their technology. The company’s current GPU architecture is reaching the end of its life cycle, which means that newer technologies will have to offer significantly more power and performance to justify a higher price tag.
The good news is that Nvidia’s ray tracing technology is still unmatched by its competitors. This advanced rendering method increases game performance by 300 percent without noticeably reducing image quality. As a result, it will be the de facto standard for next-generation consoles and PC gaming hardware in the years to come. That could give Nvidia a leg up against AMD and Intel, which are both developing competing technologies that will be available in the near future.
Nvidia’s short sellers are losing billions
Their stock has soared this year as investors have become enamored with the company’s AI chips, which are used to power many of the world’s most popular apps. But as the tech giant’s price has climbed, it has made a lot of short sellers very unhappy. In fact, the chipmaker’s surge on Thursday wiped out $2.3 billion in mark-to-market losses for those who have bet against it, according to data from financial analytics firm S3 Partners. That brings the overall loss for those betting against Nvidia this year to over $8 billion.
Nvidia has taken steps to address investor concerns over its valuation and growth expectations, such as securing long-term supply with Taiwan Semiconductor Manufacturing Co (TSMC), the chipmaker’s key chip supplier. The company also announced a $25 billion share buyback program that aims to return money to shareholders and boost earnings per share, a closely watched measure. But some investors are still skeptical about Nvidia’s buyback program and its value proposition.
One reason is that it would only amount to 2.1% of Nvidia’s market cap, or a “buyback yield” of just under 2% when looking over a one-year period, compared with about 2.58% for the S&P 500. That’s not particularly high compared to the likes of Apple, Alphabet and Meta Platforms, which all have buyback programs that dwarf Nvidia’s.
Another concern is that Nvidia’s buybacks could divert cash from the company to its shareholders, rather than toward its growth plans. That’s not necessarily a bad thing, but it may divert some investment capital that would otherwise go to other growth opportunities, such as acquisitions or new technology investments.
Ultimately, Nvidia’s strong earnings results and optimistic forecasts have pushed its share price higher. But the stock remains hairs away from becoming a trillion-dollar company, joining behemoths such as Alphabet, Amazon and Microsoft. And given the lofty expectations for Nvidia’s long-term growth, it might be a while before investors can fully appreciate how valuable the company is right now.
Nvidia’s stock price feels the full September effect
Nvidia’s stock price has completed a three-week basing pattern on top of the 50-day moving average, paving the way for it to test September’s all-time high near $590. A wave of positive catalysts is fueling this powerful uptrend, and accumulation readings have lifted to fresh highs, setting up a robust tailwind that raises the odds for a successful breakout.
The chipmaker largely powering the artificial intelligence boom has a lot to prove this week as investors await its quarterly report and guidance. Its shares rose on Thursday to a record, giving Nvidia a market cap of $957 billion and putting it in the exclusive $1 trillion club alongside Apple, Microsoft, Alphabet, Amazon, and Google parent company Alphabet (GOOGL).
It was one of the biggest one-day gains for any publicly traded U.S. company ever, and NVDA’s rally was powered by the belief that the age of AI is just about to take off. The Santa Clara-based semiconductor maker has seen its share price jump 160% year-to-date, easily outpacing the tech-heavy Nasdaq’s double-digit gain.
But a few bad headlines this week threatened to put the brakes on Nvidia’s meteoric rise. Regulatory bodies threw cold water on Nvidia’s plans to buy UK chip designer Arm, which would have marked the biggest semiconductor deal ever.
In addition, the invasion of Ukraine could derail production of neon, a key raw material in the manufacture of semiconductors. Then, a leaked slide on Intel’s (INTC) upcoming release showed that its new gaming chips will rival Nvidia’s highest-end cards.
This all adds up to a perfect storm of uncertainty ahead of their earnings report Wednesday, which could send shares plunging if it disappoints. But if they can keep its momentum rolling, it might yet join the ranks of the other $1 trillion companies and make investors forget about all of those near-term headwinds. After all, Nvidia’s cofounder and CEO Jensen Huang has become the world’s 37th-richest person with a net worth of $33.7 billion, and his long-term vision is still intact. This is a story that will only continue to grow.