Can Nvidia Corporation (Nasdaq: NVDA) stock, which could do no wrong last year, be trusted in 2017? And by "trust" I mean can the company live up to all of the hype investors have created? Notice that I didn't say Nvidia itself has created the hype.
Living Inside The Nvidia Bubble
While the company's entry into the realm of virtual and augmented reality, data centers, self-driving cars, and other growth markets were well-timed moves, the shares have approached bubble territory. And some investors still believe the stock -- even after more than 200% returns -- has room to run while ignoring the attractive short thesis the Nvidia story has created.
Who's Left To Buy The Stock?
But here's the question Goldman -- or any other long investor -- must ask: Who's left to buy Nvidia shares that has not already done so? Anyone who's wanted to own this company has already bought in. It's going to be a tug of war to squeeze out any sizable premium from current levels. Meanwhile, by every rational metric, Nvidia stock, which also comes with a high level of short interest, is now overpriced.
The short sellers, who control some 16.5% of the float, were punished last year. But they haven't given up. Nvidia's short interest rose about 1% to 71.43 million shares in the most recent settlement date. In other words, despite their losses and the terrible beatdown the shorts have taken, they're still showing an incredible amount of conviction. Call it stubbornness. But it's also equally irrational to expect Nvidia stock to duplicate its 2016 campaign.
Its Own Tough Act To Follow
From a valuation perspective, there's little Nvidia can do at this point to compel me to buy the stock -- not at almost 40 times EBITDA and more than 60 times earnings. Worse, the forward P/E is at 40, which is more than twice that of the S&P 500 Index. So, where's the value?
Indeed, Nvidia is coming off five consecutive quarters of beating Wall Street's estimates on both revenue and earnings per share. In the most recent quarter, the company had a breakout performance, posting record results in revenue and profit margins thanks to strong performances across all of its product lines. Revenue of $2 billion surged about 54% year-over-year, topping estimates by more than $300 million, while earnings per share of $0.94 crushed estimates by $0.37.
Without question, Nvidia is operating as well-oiled machine. But it has already been rewarded handsomely for that performance. And the stock could decline at the first sign of weakness -- something that could begin when the company reports fourth-quarter and full-year results. For the quarter ending in January, Wall Street expects Nvidia to earn $0.86 per share on revenue of $2.07 billion, translating to year-over-year growth of 146% and 50%, respectively.
For the full year, earnings are projected to rise 124% to $2.42 per share while revenue of $6.84 billion rises 36.5% year-over-year. There is nothing conservative about these numbers. But when Nvidia issued its guidance in November, which were well above consensus, the stock surged some 25%. This means not only must Nvidia crush its already-high expectations, it must also again demolish analyst guidance. And that's just too much to ask.
Here's What To Expect In 2017
With each subsequent 10% upward move in NVDA stock, investors who bought the shares lower will want to cash out. And why wouldn't they? With short sellers circling and waiting to punish the stock, these 10% and 15% price moves are going to get incrementally tougher to come by.
The bottom line: You have an expensive stock that everyone owns, which has a high level of short interest that has already delivered more than 200% returns last year. Not to mention, it is approaching periods of tougher year-over-over year comparisons. So why would you want to chase Nvidia stock and not, say, a less-sexy name like Intel (Nasdaq: INTC), which comes with far less risk and pays a 3.00% annual yield?
Risks To Consider: Despite the bearish thesis and short recommendation, Nvidia has a strong management team who have built a strong business and are executing to perfection. However, it's still possible the company gets taken out by a larger firm who's looking to build around the growth markets Nvidia has benefited from.
Action To Take: Nvidia should be kept on the watchlist of investors who have always liked the stock, but have waited for a better buying opportunity. The shares could fall 20% to 30% in 2017.
Editor's Note: It's everywhere, in everything from cell phones and handheld games to solar panels and pharmaceutical drugs. And prices are set to soar! Check out our 10 most shockingly profitable stocks of 2017...