Analysts are defending Nvidia (NASDAQ:NVDA) stock despite a loss of over 17% since the start of 2022. The Meta Platforms (NASDAQ:FB) earnings debacle shaved another 3.5% off NVDA stock when trade opened Feb. 3. Shares opened at about $244 each. They started the year over $300.
There’s no obvious catalyst. Earnings for the fourth quarter of 2021 are not due until Feb. 16.
Analysts are expecting profits of $1.01/share on revenue of $7.42 billion. A year ago earnings were 58 cents/share on revenue of $5 billion.
Performance like that has sent shares skyrocketing. Nvidia is up 80% over the last year, 287% over the last two, 750% over the last 5.
But is it time to take something off the table?
Why I Sold
After last year’s 4:1 stock split, I sold 100 shares and completely cleared my basis in the stock, bought in 2019 at $151/share. What’s left is pure profit I’m content to let ride.
Analysts think I made a mistake. Of the 25 following Nvidia at Tipranks, 26 say you should buy it, or buy more. Their one-year price target is $358, a 42% gain.
But Nvidia dropped 17% in January, along with the tech sector and the market in general. There’s growing skepticism around the “metaverse” and “Web 3.0,” both of which are driving Nvidia chip sales.
Prices on Nvidia graphics cards are finally dropping. This will thrill your teenage son, especially if he bought an energy-hogging desktop machine while you switched to a sleek laptop.
Nvidia is also closely tied to Meta. There are 16,000 Nvidia graphics processors at the heart of Meta’s new “supercomputer for AI,” meant to drive its metaverse development.
Nvidia’s growth also has trustbusters worried. It’s quietly walking away from the $40 billion purchase of ARM Holdings from Softbank (OTCMKTS:SFTBY), because it couldn’t get the deal past regulators. (Softbank is expected to take ARM public instead.)
Bottom Up Metaverse
Nvidia is using a “bottom up” approach to the metaverse.
It’s offering artists free access to Omniverse, an interactive modeling tool first announced in 2019. It sells corporations licenses to the tool for $9,000, but it’s giving access free to “creatives” to grow the industry.
This is something most investors still don’t understand about Nvidia. It’s called a chip company, like Advanced Micro Devices (NASDAQ:AMD). But its designs are fabricated by Taiwan Semiconductor (NYSE:TSM). Like AMD, it’s really a software house. This is in contrast to Intel (NASDAQ:INTC), which is spending $100 billion to increase manufacturing capacity and is worth just one-third of Nvidia, which doesn’t have to make that investment.
This has proven to be the right approach to the market. Moore’s Second Law means that the cost of producing chips rises alongside their complexity. But what I call Moore’s Law of Software, driven by the cloud, lets software automatically scale everywhere. It’s where the money is in tech.
The Bottom Line
By any conventional measure NVDA stock is still expensive.
If it hits analyst targets, it could deliver $26.4 billion in sales for its 2022 fiscal year. Its fiscal 2021 sales were $16.7 billion. But that means Nvidia is still selling at 24 times its expected sales. The price to earnings ratio is 77.
That’s why I took something off the table. Stocks at these valuations are vulnerable to the slightest upset. But this also offers opportunity for those with cash. There’s nothing wrong with Nvidia as a company. Its problems are all in the market’s head. Look for your buy point, and pounce.
On the date of publication, Dana Blankenhorn held long positions in NVDA, INTC and TSM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack.