Is Nvidia really a bargain or is there more pain to come? (NASDAQ: NVDA)


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About ten months ago, I dove deep into NVIDIA (NASDAQ: NVDA) share price and laid out my thesis on why investors should be less concerned about the company’s business fundamentals and focused on its momentum exposure.

Although this This may seem counter-intuitive, because sooner or later fundamentals matter, Nvidia is always at the mercy of factors that have little to do with actual company performance. This is why, since September of last year, the company has lost almost 35% of its value, while at the same time the S&P 500 has fallen by just under 15%.

Data by YCharts

Such a large drop relative to the broader market was disappointing even after adjusting for Nvidia’s high 1.6 beta. In contrast to this disastrous share price performance, however, the company continued to grow its quarterly sales figures at a rate of nearly 50%.

Nvidia quarterly sales growth

prepared by the author, using data from Seeking Alpha

Not only that, but gross and operating margins have continued to improve in recent quarters since I covered the business.

Nvidia quarterly margins

prepared by the author, using data from Seeking Alpha

A slowdown in the revenue growth rate could be partly to blame, however, Nvidia’s forward revenue growth rate isn’t much different now than it was in September 2021.

semiconductor sales growth rate

prepared by the author, using data from Seeking Alpha

In fact, AMD’s (AMD) forward revenue growth rate is much higher today than it was then and yet the company’s stock price has risen. performed remarkably similar to Nvidia’s, thereby also significantly underperforming the S&P 500, even on a risk-adjusted basis. .

Data by YCharts

So what happened?

In short, the risk that I highlighted in September has materialized. While I won’t go into detail again in this article, I will point out that Nvidia’s dynamic exposure combined with monetary tightening (or at least expectations of it) were the main factors behind Nvidia’s poor performance. company over the past 10 months. period.

I also covered how the whole process works in my thought piece titled “The Cloud Space by the Numbers: What Matters Most”, where I did a case study based on another high-growth industry. .

Monetary tightening is having a profound impact on high duration stocks and unfortunately, Nvidia remains one of the companies most exposed to rising interest rates in the semiconductor sector.

Valuation of semiconductors

prepared by the author, using data from Seeking Alpha

Even though the relationship between forecast revenue growth rate and forecast P/E ratios has weakened considerably since September last year, the flattening of the slope of the trend line above is the cause of poor business performance in the upper right corner. even as their business fundamentals improved.

One of the reasons Nvidia is still so far above the above trendline is that in addition to its industry-leading growth rate, it also has one highest margins within the broader semiconductor peer group. The premium price of Nvidia’s GPUs also sets it apart from AMD, which is priced at much lower multiples.

Is Nvidia stock a good deal?

Nvidia is arguably one of the highest quality semiconductor companies with huge growth opportunities in data centers and the automotive sector. However, it now trades at more than twice the industry average forward P/E ratio.

P/E ratios of semiconductors

prepared by the author, using data from Seeking Alpha

Additionally, recent developments in the GPU market have resulted in never-before-seen premiums for Nvidia products thanks to strong demand from consumers, data centers, and cryptocurrency miners. All of this has boosted margins to levels well above its historical results and industry median estimates.

Nvidia Margins

Looking for Alpha

However, that doesn’t mean Nvidia is suddenly a good deal, just because a high-growth, highly profitable company is trading at a non-GAAP P/E ratio of less than 30x.

The main reason why the absolute value of its price/earnings ratio could be misleading is that the semiconductor industry is very cyclical. Therefore, during cycle peaks, P/E ratios tend to be low due to high earnings and stock prices reflecting the risk of slower future sales growth.

Although the recent push towards digitalization has somewhat dispelled the risk that semiconductors are cyclical, the industry remains closely tied to the economic cycle (see below).

Semiconductors vs GDP

Source: prepared by the author, using data from FRED and

More importantly for Nvidia’s share price, however, is the fact that it still exhibits a strong correlation to the MTUM index minus VLUE – an index that takes a long position in iShares Edge MSCI USA Momentum Factor ETF (MTUM ) and a short position in iShares Edge ETF MSCI USA Value Factor (VLUE).

Exposure to Nvidia's Momentum

prepared by the author, using data from Seeking Alpha

As a result, Nvidia’s share price will continue to be very sensitive to momentum trade and more specifically to overall equity market liquidity. That said, if the current cycle of monetary tightening continues, Nvidia will likely continue to underperform even if the company’s fundamentals remain strong.

On the contrary, if the Federal Reserve were to reverse course and embark on a new monetary easing journey, then Nvidia could potentially return to its 2021 highs. Although such a scenario cannot be ruled out, it remains very uncertain. . Moreover, if that doesn’t happen, then it will be many years before Nvidia returns to its all-time highs, all assuming the company maintains its market leadership.


In the past two months since I first covered Nvidia, the company’s share price has gone from a shining star in the tech sector to a significant underperformer, both on an absolute and risk-adjusted basis. Although this has convinced many commentators that Nvidia is now a good deal and that the market does not understand the company’s future opportunities, in reality Nvidia may continue to disappoint. Even though management continues to execute on the strong track record and demand remains robust for years to come, Nvidia’s stock price is still at the mercy of monetary conditions and available liquidity.


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