NVIDIA Corporation (NVDA) has surged 62.7% year-to-date to close the last trading session at $232.86. Despite an intraday decline of 1.6%, the stock is trading way above its 50-day and 200-day moving averages of $184.72 and $163.51, respectively. However, I think it could be wise to wait for a better entry point in the stock, and I will explain why.
The global provider of graphics, computation, and networking solutions operates through two segments: Graphics and Compute & Networking.
NVDA’s revenue has exhibited a 35.2% CAGR over the past three years. During the same time horizon, the company’s EBITDA and net income have also grown at 30.2% and 16% CAGRs, respectively.
Let’s closely examine its fundamentals:
Regression in Financial Performance
For the fourth quarter of the fiscal year, which ended January 29, 2023, NVDA’s revenue decreased 20.8% year-over-year to $6.05 billion, while its gross profit declined 23.3% year-over-year to $3.83 billion. The company’s non-GAAP operating income decreased 39.5% year-over-year to $2.22 billion during the same period.
As a result, its non-GAAP net income for the quarter decreased 35.1% and 33.3% year-over-year to $2.17 billion, or $0.88 per share.
For the fiscal year that ended January 29, 2023, NVDA’s revenue remained almost flat at $26.97 billion, while its gross profit declined 12.1% year-over-year to $15.36 billion. The company’s non-GAAP operating income decreased 28.8% year-over-year to $9.04 billion during the same period.
Its non-GAAP net income for the fiscal decreased 25.7% and 24.8% year-over-year to $8.37 billion, or $3.34 per share.
NVDA’s total assets came in at $41.18 billion as of January 29, 2023, compared to $44.19 billion as of January 30, 2022.
Excellent Profitability
Despite the recent ebb in performance, conveyed by its recent financial results, NVDA’s profitability remains ahead of the pack. Its trailing 12-month Gross Profit margin of 56.93% exceeds the industry average of 49.18%.
Similarly, the company’s trailing 12-month EBITDA and net income margins of 26.40% and 16.19% surpass the respective industry averages of 11.22% and 2.86%
Moreover, NVDA’s trailing 12-month ROCE, ROTC, and ROTA of 17.93%, 9.63%, and 10.61% compare favorably to the respective industry averages.
Mixed Analyst Estimates
Analysts expect NVDA’s revenue and EPS for the first quarter of fiscal 2024 to decline 21.5% and 33.1% year-over-year to $6.51 billion and $0.91, respectively.
However, for fiscal 2024, NVDA’s revenue and EPS are expected to increase 10.1% and 33.4% year-over-year to $29.69 billion and $4.45, respectively. Revenue and EPS are expected to increase 22.9% and 32.2% during the next fiscal year to $36.49 billion and $5.89, respectively.
Stretched Valuations
In terms of its forward P/E, NVDA is trading at 52.27x, 162.9% higher than the industry average of 19.89x.
Similarly, NVDA’s forward EV/Sales and EV/EBITDA multiples of 19.30 and 56.08 are higher than the respective industry averages of 2.83 and 12.50.
NVDA’s forward Price/Sales and Price/Book ratios of 19.34 and 21.14 also compare unfavorably to the industry averages of 2.73 and 3.85, respectively.
POWR Ratings Reflect Mixed Outlook
NVDA’s mixed outlook is reflected in its POWR Ratings. The stock has an overall rating of C, which equates to a Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. NVDA has a B grade for Quality and Sentiment, in sync with its above-industry-average profitability and optimistic analyst estimates for the fiscal.
Despite demonstrating healthy business growth over the last three years, underwhelming financial performance during the previous quarter and fiscal year is reflected in its C grade for Growth. NVDA also has a C grade for Momentum, consistent with signs of weakness and potential reversal in price action.
NVDA’s stretched valuation, a beta of 1.79, and a relatively large spread between its 52-week high and low prices of $289.46 and $108.13 are reflected in F and D grades for Value and Stability, respectively.
NVDA ranks #64 of 92 stocks in the B-rated Semiconductor & Wireless Chip industry.
Click here to see all POWR Ratings of NVDA.
Bottom Line
NVDA is well-positioned to capitalize on the tailwind of accelerated interest in the versatility and capabilities of generative AI. Its new AI supercomputer, with H100 and its Transformer Engine and Quantum-2 networking fabric, is in full production and would help customers take advantage of breakthroughs in large language models.
Moreover, the company has partnered with Hon Hai Technology Group (Foxconn) to develop automated and autonomous vehicle platforms.
However, NVDA still has to deal with near-term challenges of growing pressures on consumer spending, including high inflation and rising interest rates. After the pandemic-fueled boom, demand has also softened due to crypto winter and consumer electronics sales losing momentum amid a reversal to pre-pandemic lifestyles.
Hence, given its relatively high valuation and the near-term macroeconomic uncertainties that it is expected to deal with, it would be wise for investors to wait for a better entry point in this stock.
Stocks to consider as alternatives to NVIDIA Corporation (NVDA)
Given its uncertain short-term prospects and the recent surge in stock price, the likelihood of NVIDIA’s stock outperforming in the weeks and months ahead appears low. However, there are many industry peers with much more impressive POWR Ratings. So, consider these 3 A-rated (Strong Buy) or B-rated (Buy) stocks from the Semiconductor & Wireless Chip industry instead:
STMicroelectronics (STM)
United Microelectronics Corporation (UMC)
Tower Semiconductor Ltd. (TSEM)
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NVDA shares were trading at $238.13 per share on Monday morning, up $5.27 (+2.26%). Year-to-date, NVDA has gained 62.95%, versus a 4.48% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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