Is Nvidia A Buy After Its Record 2020?
Back in October 2020, I showed you 1 Reason To Avoid Nvidia stock in your retirement portfolio. Even though it at the time was the 13th largest company in the world.
Today, I give an update after it released its latest quarterly earnings and answer – Is Nvidia A Buy After Its Record Year? You can read the full articles above.
But if you don’t want to; here’s a quick recap of why I said to avoid it in the previous article…
1 Reason To Avoid The 13th Largest Stock In The World
It’s Enormously Overvalued
Normally in these articles I talk about profitability, cash flow, the affects coronavirus is having on a company’s financials among other things.
But frankly none of those matter with Nvidia (NVDA) due to its huge valuation.
Nvidia is the world’s leading designer of graphics processing units (GPU’s). These are the things that show up as graphics, pictures, videos on computers, phones, and even car entertainment centers.
Due to the rapid increase in the need for ever better graphics in the last decade as the internet and smart phones evolved, its revenues exploded… From $3.5 billion in 2010 to $13.1 billion in the last twelve months.
This is an increase of 2.7X in the last 10 years.
Which led to huge increases in profits and cash flows in this time.
Its net income rose from $253 million in 2010 to $3.4 billion in the last 12 months. This is a 12.4X increase in the last 10 years.
And its free cash flow rose from $578 million in 2010 to $5 billion in the last 12 months. This is a 7.7X increase in the last 10 years.
This exponential growth in revenues, profits, and cash flows helped skyrocket Nvidia shares in this time.
From $18.68 per share at the beginning of 2010 to $558.24 per share as of this writing.
This is an increase of 28.9X or 2890%.
The growth in its share price now makes it the 13th largest company in the world based on market cap.
You’re doing well if you earn 10% investment returns per year on the stocks you own. Nvidia produced investment returns of 289% per year on average over the last decade.
Its growth should continue as the need for videos and graphics continue to increase over time. Which is illustrated with Nvidia’s continued growth in revenues, profits, and cash flows even during this pandemic.
This is all great for Nvidia and its shareholders… But it also leads to a huge problem.
It’s massively overvalued.
Its P/E is 100.8.
Its P/CF is 61.2.
And its forward P/E is 51.3.
I look to buy companies with valuations below 20 on all these metrics to consider the company undervalued or at worst fairly valued…
Nvidia crushes this threshold.
Does this mean I think Nvidia stock will crash and burn?
No. I expect it to continue performing well going forward… But not as well as it did in the past due to its large valuation.
For the reason of its overvaluation I recommend you avoid its stock… There are safer, cheaper, and higher return stocks you can buy now.
This thesis to avoid Nvidia until its cheaper continued to play out since October… Sort of.
It released its latest earnings on February 24th that showed many record numbers.
- Revenue jumped 61% in the year-to-year quarterly period to $5 billion.
- Earnings per share rose 51% in the year-to-year quarterly period to $2.31 per share.
- Full year revenue rose 53% to $16.68 billion.
- And full year earnings per share rose 73% to $10 per share.
This all due largely to the company’s gaming and data center units which achieved record revenue for the quarter and the full year.
Since October when I first told you to avoid Nvidia, its shares are down 1.8% since then… Despite these record numbers.
Because when stocks are massively overvalued… They must keep producing spectacular results for the share price to continue rising.
And even in that case – which is what Nvidia achieved – it wasn’t enough.
This is why investing in overvalued stocks is so dangerous.
If everything doesn’t go exactly right… Share prices can fall.
But did Nvidia share price fall enough and profits rise enough to make it a buy now?
Its P/E is now 80.2.
Its P/CF is 59.7.
Its forward P/E is 41.5.
And its enterprise value to operating income – EV/EBIT is 73.9.
On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.
And on EV/EBIT I look to buy stocks below 8.
These show that Nvidia is more fairly valued now than it was in October… But that its still massively overvalued.
And this means buying its stock does not give you a margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning it in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning it going forward.
With Nvidia being overvalued it makes the investment riskier.
I’ll keep you updated on Nvidia in the coming months… But for now, continue being patient and wait to buy its stock until it’s cheaper.
Plus, I’ve already found better potential investments for you…
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.