Nvidia: Don’t Wait Till Everyone Starts Selling

Summary:

• Nvidia sent bearish investors fleeing for the hills as the stock made a new all-time high.
• CEO Jensen Huang and his team played its AI picks-and-shovels card to maximum effect while posting blockbuster guidance, putting numbers to the hype.
• However, the market quickly priced in the optimism, lowering the risk/reward appeal to investors who missed adding pre-earnings.
• Can Nvidia continue to post such massive outperformance in guidance every quarter? It’s essential to maintain sanity and don’t keep chasing unsustainable momentum.
• Taking some profits/exposure off the table with NVDA still overvalued is the right thing to do. Keeping an allocation to continue riding the hype train until the momentum dissipates.

NVIDIA Corporation (NASDAQ:NVDA) sent bearish investors running for cover as NVDA re-tested its November 2021 highs, following a blowout guidance, putting solid numbers behind the generative AI hype.

CEO Jensen Huang’s answer to the bears (including me) is that Nvidia is clearly the AI picks and shovels market leader, trusted by “cloud service providers or CSPs, consumer Internet companies and enterprises.”

With AMD (AMD) and Intel (INTC) nowhere close to disrupting Nvidia’s full-stack ecosystem, the company is well-placed to help the world build its generative AI infrastructure.

Huang’s stunning guidance suggests that Nvidia is ready to post YoY revenue growth of about 64% in the upcoming quarter, led by its leadership in data center GPUs. In addition, management added that underlying demand by the cloud service providers or CSPs is robust. As such, the company has “visibility right now for [its] data center demand that has probably extended out a few quarters.”

The company has strengthened its supply chain resilience by making big orders with its suppliers. As a result, Nvidia’s orders have pleasantly surprised the semi-supply chain, as DIGITIMES highlighted that it “has placed rush orders with TSMC (TSM) for its H100 and A100 GPUs, as well as the H800 and A800 designed specifically for China.”

As such, it has lifted the gloom over Taiwan Semiconductor or TSMC’s FY23 revenue growth projections, which is expected to see a significant boost. Accordingly, the “rush orders” have raised TSMC’s 5nm process utilization rate “close to full capacity.” It has also increased the utilization rates for its 6nm and 7nm process family.

Therefore, the orders are in, suggesting why the market rewarded Nvidia with a 25% increase to close Thursday’s (May 25) session. In addition, I highlighted in a recent Intel article stressing why Nvidia is ready to take on Intel’s data center CPU leadership by remodeling it with its data center GPUs.

With an unmatched software ecosystem at the moment, Nvidia is riding the AI hype in full swing while leaving its arch-rivals behind. However, Nvidia is in no mood to rest on its laurels, as Huang cautioned that the competition is highly intense:

Regarding competition, we have competition from every direction. Start-ups, really, really well funded and innovative start-ups, countless of them all over the world. We have competitions from existing semiconductor companies. We have competition from CSPs with internal projects, and many of you know about most of these. And so we’re mindful of competition all the time, and we get competition all the time. – Nvidia FQ1’24 earnings call

However, what’s important for investors to recognize is that Nvidia is focused on offering its customers the most cost-effective package (hardware and software).

The high costs of offering high-quality AI solutions and continued cloud optimization by enterprise customers suggest that service providers will likely be very sensitive to costs.

As such, Nvidia believes it has such a significant lead in this aspect that Huang is confident that the company offers its customers the “lowest-cost solution.”

With that in mind, Nvidia likely sees significant opportunities to reach into the $1T data center installed base. Moreover, with generative AI demanding more intense computational resources, Nvidia’s solutions would likely see GPU CapEx spending increasing markedly from just “10% historically.“

However, the critical question is whether Huang and his team can consistently deliver such monstrous guidance, stunning analysts and investors moving ahead.

While I do not doubt that, Nvidia remains a core holding in my portfolio, I already took the opportunity to unload some exposure at the highs yesterday. Interestingly, given the significantly revised forward estimates following management’s guidance, NVDA’s overvaluation has not “worsened” compared to pre-earnings.

It’s still overvalued but to a similar extent based on my blended fair value estimates. In addition, its pre-earnings NTM adjusted P/E of 70x is way higher than its post-earnings adjusted P/E of 42.3x.

Therefore, if we consider NVDA’s relative and intrinsic valuation per se, investors shouldn’t be stunned by the market’s reaction. Instead, market operators quickly priced in the company’s blockbuster guidance appropriately.

However, NVDA’s price action still suggests significant caution as more FOMO buyers rush in, attempting to buy the potential breakout opportunity. As a result, I assessed that the possibility of another spike or two to force out early short-sellers is possible. If that happens, I would consider closing all my positions in NVDA and wait for a steep pullback that could help level off a significant level of optimism before I return.

While I reiterate my Sell rating, I urge investors not to close all their positions but take exposure off progressively to hedge against further upside volatility until they see a decisive bull trap.

Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of NVDA, AMD, INTC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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