Nvidia’s Massive Stock Gains May Be Over Following Quarterly Results

Expectations for Nvidia Corp. (NVDA) couldn’t have been higher going into its fiscal second-quarter 2021 results, and now the stock may feel the effect of the hangover. The stock’s price nearly tripled off the March lows, as investors’ attention turned to companies likely to capture market share during the pandemic. As a result, the equity soared to an all-time high of around $500 from a low of approximately $180 in March. The market capitalization jumped to roughly $300 billion, surpassing Intel Corp. (INTC) along the way.

The company had a great quarter easily beating analyst expectations, and providing better than expected guidance with strong growth across its gaming and data center units. But, not all was well, with much of the growth coming from its acquisition of Mellanox, with the group contributing 14% to total revenue and just over 30% to data center revenue. Additionally, on the conference call, Nvidia noted it expects a dramatic slowdown in data center growth next quarter.

Trouble Ahead?

It seems that investors aren’t entirely pleased, with the shares falling in the after-hours. The stock has risen in a nearly perfect trading channel off of the March lows. Now, it is falling and testing a critical level of support around $475. Should the stock fall below that level of support, it could drop to the lower end of the trading channel to a price of around $440, a decline of an additional 7%.  If it breaks below $440 and the channel entirely, it could be the sign of a much steeper drawdown.

Multiple Expansion

One reason why the stock has been able to advance so smoothly is that a significant portion of those gains came mainly on the heels of multiple expansion. Nvidia’s PE ratio has soared to 49 times fiscal 2022 earnings estimates. That is the stock’s highest earnings multiple since January 2018. The shares have had an average forward earnings multiple of about 28 over the past two years. Analysts’ earnings estimates have increased by 6.5% to $9.91 from $9.30 since February, compared to the equity’s massive gains.

Massive Beat

Much of that advance was in anticipation of better than expected results, and the company delivered. Nvidia reported revenue of around $3.86 billion in the fiscal second quarter, about 6% higher than the estimate for $3.65 billion. Meanwhile, earnings came in at $2.18 per share, nearly 11% higher than estimates for $1.97 per share, according to data provided by Refinitiv.

The company’s data center unit had the most significant contribution to overall revenue coming at $1.75 billion, edging out its gaming segments revenue of $1.65 billion, for the first time. The data center unit had enormous growth, rising by 167% versus last year, and 54% sequentially, with the addition of Mellanox.  But the company noted that data center growth would slow tremendously next quarter, and was only expected to rise in the low to mid-single digits sequentially.

Nvidia has an incredible ability to drive dramatic growth in its business, and those long-term prospects aren’t likely to change anytime soon. It doesn’t mean the stock’s valuation can’t get ahead of itself at times, leading to the earnings multiple contracting. Don’t be surprised if that time is now.

Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.

Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future results.