NIVDIA Spikes After Earnings: Is It Overvalued?

Yesterday, after the bell, NVIDIA Corp (NASDAQ:NVDA) announced solid results, topping the Zacks Consensus Estimate by 11.9% on the top line and 41.5% on the bottom line. Both numbers were up strong double-digits from the same quarter last year.

The Gaming segment that contributes more than two-thirds of its total volume, grew 25%, as the company saw strength across regions and form factors. Management also called out strength in the Nintendo Switch console and cryptocurrencies as drivers. The Data Center segment, which accounts for most of the balance, saw the strongest growth of 109%, testimony to NVIDIA’s growing position at cloud service providers and prowess in high performance computing (HPC). The emerging Professional Visualization segment grew 15%, as VR adoption at defense and automotive customers increased and demand for high-end real-time rendering, simulation and more powerful mobile workstations and grew.

Coming off the strong results, management raised the quarterly dividend and promised to return $1.25 billion in 2019 through dividends and share repurchases.

Guidance was also encouraging with revenue expectations of $2.65 billion for the January quarter bettering the Zacks Consensus Estimate of $2.44 billion.

Investors responded to the news by sending share prices up 3.2% in extended trading. But is the stock a buy at these levels? Let’s find out:

The share price has increased 8.7% over the past month compared to the industry’s 13.6%. The S&P 500 has however has grown much slower, at 1.9%.

Over the past year, the S&P 500 has gained steadily to trade close to its 52-week high, but NVIDIA shares have been far more volatile. Significantly, its median value of 94.3% is higher than the S&P 500’s 91.6% although both NVDA and the S&P 500 are currently trading considerably higher than their median levels.

The industry has a much lower median value, although it is currently trading closer to its 52-week high. These comparisons seem to indicate that there is room for further upside in NVDA shares.

P/E

The forward 12 months price-to-earnings ratio for NVDA is currently 53.3X compared to the S&P 500 average of 18.8X and the industry average of 20.0X. The high, low and median values are also higher. Moreover, the trend lines indicate that NVDA is clearly overvalued both with respect to the S&P 500 and the industry.

P/S

The trailing 12 months price to sales ratio tells the same story. The P/S ratio for NVDA is currently 15.6X, which is higher than the S&P 500’s 3.15 but much lower than the X industry’s 6.25. The median of 3.34 is slightly ahead of the S&P 500’s 3.4 and the industry’s 5.0X. The highs and lows also indicate that NVDA is overvalued both with respect to the S&P 500 and the industry.

P/CF

In terms of cash flow, NVDA’s valuation of 56.4X is much higher than the S&P 500’s 23.1X and the industry’s 25.0X. Moreover, the highs, lows and median values are also much higher.

Look at Its Peers…

While Advanced Micro Devices (NASDAQ:AMD) is NVIDIA’s closest competitor when it comes to GPUs, Intel (NASDAQ:INTC) is the one that it is increasingly pitted against as both companies look for growth in the data center, self-driving cars and other IoT. So let’s compare the two first.

Intel’s current P/E based on forward 12 months earnings is just 14.2X, its price to sales ratio is 3.6X and its price to cash flow is 18.4X. So NVDA is obviously overvalued compared to Intel.

A comparison with another semiconductor company Texas Instruments (NASDAQ:TXN) shows that this chipmaker has a P/E based on forward 12 months earnings of 21.7X, a price to sales ratio of 6.7X and a price to cash flow of 21.6X. Here too, NVDA looks overvalued.

Conclusion

It’s true that NVDA has a solid pipeline that should continue to generate strong growth for years to come. But given the strong competition from companies like Intel and ongoing consolidation in the space, it could soon see many other competitors in Qualcomm (NASDAQ:QCOM) , NXP Semiconductor (NASDAQ:NXPI) , Broadcom (NASDAQ:AVGO) , IBM (NYSE:IBM) , etc.

So the high valuation with respect to the S&P 500, the industry in which it operates and a couple of its semiconductor peers, is good reason for caution. Or at least, it’s good reason to go for Intel or Texas Instruments instead. Both these companies have a Zacks Rank #1 (Strong Buy) -- you can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here - that’s better than the Zacks Rank #2 (Buy) assigned to NVIDIA.

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