Time to Short NVIDIA?

I have been a long-term NVIDIA (NVDA) bull and I first recommended the stock when it was trading at under $18 two years ago. The stock has shot up 150% since then and I still believe NVIDIA is a great company. Although NVIDIA is a well-oiled machine, it doesn’t mean you should invest in it. Especially not at current prices.

When it comes to efficient execution, NVIDIA is much better than its primary rival Advanced Micro Devices (AMD). However, given NVIDIA’s valuation, I strongly believe investors should book profits at current levels.
Investors who have an appetite for risk can even consider shorting NVIDIA for the short-term as I think the stock’s valuation is just too high to be justified.

Valuation

Currently, NVIDIA is trading at 38x trailing earnings and has a P/S ratio of over 4.7. Clearly the stock is expensive, and the only thing that could justify these numbers would be strong future growth.  However, in NVIDIA’s case, its valuation can’t be justified.

According to Yahoo! Finance, Wall Street analysts are expecting NVIDIA’s revenue to jump 11.5% this year and 3.9% in the next fiscal year. A company with a P/E ratio of almost 40 should be reporting about 30% annual growth for two to three years.

In NVIDIA’s case, even if the company beats the analysts’ estimates for the next eight quarters, it would still not achieve the 30%+ growth target that would justify its valuation.

Peer pressure

AMD has always struggled against NVIDA. However, 2016 could mean AMD winning back market share in the graphic card segment from NVIDIA. After years of losing ground, it looks like AMD is finally clawing its way back under the leadership of new CEO Lisa Su.

AMD’s Polaris architecture will likely trouble NVIDIA in the mainstream market as the latter has exclusively focused on the high-end graphics card for now. Although focusing on the high-end will improve NVIDIA’s margin, AMD will get the early movers advantage in the mainstream market. Amid stiff competition from AMD, it will be very difficult for NVIDIA to justify its current valuation.

Conclusion

As someone who has always loved NVIDIA’s products and the company, it pains me to say that the stock may be a good short right now. With uncertainty surrounding the market following Brexit, and tough competition from AMD, NVIDIA will not be able to sustain its valuation for long. I think the stock has about 15% to 20% downside potential, thereby making it a good short.
Published on Jun 30, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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