With a $1.15 trillion market cap, NVIDIA Corporation (NVDA) provides graphics, and compute and networking solutions in the United States, Taiwan, China, and internationally. After a tough 2022, the company has been booming this year due to the significant surge in AI popularity post the launch of OpenAI’s ChatGPT and subsequent demand for the company’s hardware.

As one of the biggest winners of the AI boom, NVDA’s stock has gained 122.1% over the past six months and 224.9% year-to-date to close the last trading session at $465.07. Recently, the stock hit a new high of $480.88 on July 14, 2023.

Moreover, the chip giant is attracting the attention of smart money. Institutions own nearly 65.4% of NVDA, and the total value of holdings is around $750,880.

The chip giant is making consistent progress in pushing AI forward via strategic partnerships. On July 26, NVDA, in partnership with ServiceNow Inc. (NOW) and Accenture (ACN), announced the launch of AI Lighthouse, a first-of-its-kind program designed to fast-track the development and adoption of enterprise generative AI capabilities.

On June 26, NVDA partnered with Snowflake Inc. (SNOW) to help businesses leverage their data for generative AI in the data cloud applications. By integrating NVIDIA NeMo with Snowflake, businesses can securely build custom large language models using their proprietary data in the Snowflake Data Cloud. Such partnerships with leading companies should bode well for Nvidia.

NVDA is also committed to making new, innovative product launches in the AI field. On May 28, NVDA launched NVIDIA Spectrum-X™, an accelerated networking platform designed to improve the performance and efficiency of Ethernet-based AI clouds.

NVIDIA Spectrum-X is built on networking innovations powered by the tight coupling of the NVIDIA Spectrum-4 Ethernet switch with the NVIDIA BlueField®-3 DPU, achieving 1.7x better overall AI performance and power efficiency. World-leading cloud service providers are adopting this platform to scale out generative AI services.

Also, in the same month, the company announced a new class of large-memory AI supercomputer, an NVIDIA DGX™ supercomputer powered by NVIDIA® GH200 Grace Hopper Superchips and the NVIDIA NVLink® Switch System, created to enable the development of massive, next-generation models for generative AI language applications, recommender systems, and data analytics workloads.

Despite dominating the AI landscape, NVDA’s first-quarter results paint a disappointing picture. The company’s revenue declined 13.2% year-over-year, and its non-GAAP net income and non-GAAP net income per share were 21.2% and 19.9% down, respectively.

Furthermore, the company is expected to grapple with several macroeconomic headwinds in the near term, including high borrowing costs, lingering supply chain disruptions in the chip industry, and eroding consumer spending amid recessionary pressures.

Here’s what could influence NVDA’s performance in the upcoming months:

Deteriorating Financials

For the first quarter that ended April 30, 2023, NVDA’s revenue decreased 13.2% year-over-year to $7.19 billion. The company’s gross profit declined 14.4% from the year-ago value to $4.65 billion. Also, its non-GAAP income from operations was $3.05 billion, a decline of 22.8% year-over-year.

Furthermore, the company’s non-GAAP net income decreased 21.2% from the prior-year quarter to $2.71 billion, while its non-GAAP EPS came in at $1.09, down 19.9% year-over-year.

Favorable Analyst Estimates

Analysts expect NVDA’s revenue for the fiscal 2024 first quarter (ended July 2023) to increase 65.1% year-over-year to $11.07 billion. The consensus earnings per share estimate of $2.07 for the to-be-reported quarter indicates an improvement of 305.8% year-over-year.

In addition, analysts expect the company’s revenue and EPS for the fiscal year (ending January 2024) to increase 61.2% and 137.6% year-over-year to $43.48 billion and $7.93, respectively. Also, NVDA’s revenue and EPS for fiscal 2025 are expected to grow 29.2% and 37.2% year-over-year to $56.18 billion and $10.88, respectively.

Stretched Valuation

In terms of forward non-GAAP P/E, NVDA is currently trading at 58.62x, 144% higher than the industry average of 24.03x. The stock’s forward EV/Sales of 26.38x is 800.4% higher than the industry average of 2.93x. Likewise, NVDA’s forward EV/EBITDA multiple of 60.47 is 307.8% higher than the industry average of 14.83.

Also, the stock’s forward Price/Sales of 26.45x is 806.6% higher than the industry average of 2.92x. Its forward Price/Cash Flow multiple of 58.20 is 182.9% higher than the industry average of 20.58.

Robust Profitability

NVDA’s trailing-12-month gross profit margin of 56.31% is 16.2% higher than the 48.45% industry average. Its trailing 12-month EBITDA margin of 23.53% is 164% higher than the 8.92% industry average. Also, the stock’s trailing 12-month net income margin of 18.52% is significantly higher than the industry average of 2.11%.

Furthermore, NVDA’s trailing 12-month ROCE, ROTC, and ROTA of 18.86%, 7.52%, and 10.78% are favorably higher than the industry averages of 0.50%, 2.09%, and 0.06%, respectively.

POWR Ratings Reflect Uncertainty

NVDA’s mixed fundamentals are reflected in its overall C rating, equating to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. NVDA has a B grade for Quality, in sync with higher-than-industry profitability.

NVDA has an A grade for Sentiment and a C for Growth, consistent with its weak financials and optimistic analyst expectations.

On the other hand, the stock has an F grade for Value, consistent with its higher valuation relative to its industry peers. Also, its 24-month beta of 2.02 justifies a D grade for Stability.

NVDA is ranked #45 out of 92 stocks in the Semiconductor & Wireless Chip industry.

Beyond what I have stated above, we have also given NVDA grades for Momentum. Get all NVDA’s POWR Ratings here.

Bottom Line

NVDA’s stock is currently trading above its 50-day and 200-day moving averages of $415.93 and $258.35, respectively. After crashing in 2022, the stock has been riding high on the current AI boom. However, the chip giant reported disappointing financials in the first quarter of 2023 and could face several macroeconomic headwinds in the near term.

Given NVDA’s bleak financials, significantly high valuation, and near-term macroeconomic uncertainties, it could be wise for investors to wait for a better entry point in this chip stock.

Stocks to Consider Instead of NVIDIA Corporation (NVDA)

Given its uncertain short-term prospects, the odds of NVDA outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) stocks from the Semiconductor & Wireless industry instead:

Infineon Technologies AG ADR (IFNNY)

SUMCO Corporation (SUOPY)

Renesas Electronics Corporation (RNECF)

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NVDA shares fell $465.07 (-100.00%) in premarket trading Wednesday. Year-to-date, NVDA has gained 213.21%, versus a 19.60% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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