SSNLF - Nvidia Stock Is Overvalued I Prefer The ARM IPO Instead

2023-05-30 12:48:25 ET

Summary

• Nvidia Corporation reported a fantastic quarter on May 5.
• With a market cap approaching a trillion dollars, Nvidia Corporation may be overpriced.
• A viable alternative to Nvidia Corporation would be the ARM Holdings Plc. IPO if it's not priced too high.

Overview:

Nvidia Corporation ( NVDA ) has become a very controversial stock on Seeking Alpha. With the unending talk about AI (Artificial Intelligence), NVDA's emphasis on high-end GPUs (Graphic Processing Units) has put it in the spotlight.

GPUs have an advantage over CPUs (Central Processing Units) because they can process huge amounts of data in parallel meaning at the same time. CPUs on the other hand process information serially, i.e., one step at a time. This makes sense if you are doing a mathematical calculation because you can't do the 4th step in the calculation until you've done the first 3 steps. Since traditionally computers going all the way back to the Eniac did mostly math , it made sense to have the CPU.

However, in the modern age, we need to do such things as refresh a 4K TV's 8 million pixels 120 times a second. That's the kind of thing GPUs do best.

On May 4th, 2023, after the close, Nvidia Corporation reported Q1 results that astounded everyone. The price of the stock jumped more than 25% , going from about $300 to $390.

The reason was NVDA's huge increase in revenue and profits as data center revenue surged and, in fact, all segments saw revenue increases.

In terms of revenue, NVDA ranks number 7 in the top 10 of semiconductor companies.

But as we will see later in this analysis, NVDA is considerably more valuable than all the companies ahead of it on the revenue ladder.

In this article, I will look at Nvidia Corporation in a critical manner to emphasize why it may not be able to live up to the optimistic outlook some people have for it.

Here are 4 points to consider before investing in Nvidia Corporation.

1. Quarter Over Quarter Financial Metrics Look Great

First let's look at NVDA's financial metrics, comparing the latest quarter ending April with the previous quarter ending in January. As might be guessed, there are some pretty impressive comparisons.

I use the financial metrics to discover what I consider to be positive investment numbers (Yellow boxes) and compare them with any negative investment numbers (Orange). One quick look at the financial metrics table above comparing January to April shows significant improvement in results offset somewhat by the huge price increase which makes financial ratios (Price/Sales, P/E Ratio, and Price to free cash flow, or FCF) look extremely over-extended.

The positives are all related to NVDA's price improvement over the last quarter Stock Price (Line 1), Market Value (Line 6), and Enterprise Value (Line 7) all up more than 160% over the last quarter.

Earnings per share (Line 10) increased by 46%, while the P/E Ratio (Line 11) jumped over 87%.

Net Debt (Line 12) is a negative amount meaning there is more cash than debt for both quarters.

EBITDA (Line 13) had a nice increase of 59%.

FCF (Line 15) was also up 59%, but the Price to FCF (Line 16) jumped 69%.

More good news was the drop in inventories (Line 19) by 12% even though revenues increased substantially.

2. The Chinese Put Is Always Lurking In The Background

What I call the Chinese put is trying to determine what China will do with U.S. companies based on political needs and strategies. For example, what will China do as a response to the Chips Act - hold U.S. companies captive via restrictions or perhaps tariffs of some sort?

This is important because NVDA's second-largest revenue source is China.

On May 21, China announced restrictions on Micron Technology, Inc. ( MU ), products causing Micron's price to drop. What the long-term effect will be on Micron's performance is unknown but it almost certainly will not be good.

NVIDIA's response to China's Micron restrictions was to steadily drop in price by 2% over 3 following days until the current quarterly results were published.

Maybe nothing will happen to Nvidia Corporation, but the investing question is how do you know that with any certainty?

3. Nvidia Corporation Stock Looks Vastly Overpriced Compared To Other Semiconductor Companies

As I mentioned in the overview, NVDA is ranked 7th in the world in revenue about 1/8th the size of Samsung Electronics Co., Ltd. (SSNLF).

But looking at market value, it is in first place by a wide margin. In fact, its market value is more than 2 times Samsung's market cap.

It is hard to look at the above chart and not think NVDA stock is currently very overpriced.

Is Nvidia Corporation really worth more than Samsung and Taiwan Semiconductor Manufacturing Company Limited ( TSM ) combined?

How about worth more than ASML Holding N.V. ( ASML ), Advanced Micro Devices, Inc. ( AMD ), Texas Instruments Incorporated ( TXN ), QUALCOMM Incorporated ( QCOM ), and Intel Corporation ( INTC ) combined?

4. Why The ARM IPO Might Be A Good Alternative To NVIDIA

ARM Holdings Plc. (ARMHF) is a chip design company owned by SoftBank ( SOBKY ). It has thousands of customers that pay a fee for the use of their patents and other intellectual property. It is deeply involved in AI.

Together with 1,000+ technology partners, we are enabling artificial intelligence to work everywhere, and in cybersecurity, we are delivering the foundation for trust in the digital world – from chip to cloud. The future is being built on Arm. Source: ARM

NVIDIA knows how valuable ARM is because they offered to pay $40 billion for it in 2022, only to have it rejected by regulators.

When you ask Siri a question on your Apple iPhone, what chips do you think are working behind the scenes to get you the right answer? Yep, ARM chips. And, of course, the MacBook Pro uses ARM chips too.

Some others that use ARM chips are Amazon with their ARM server chips called Graviton.

Google (GOOG) is also developing server chips using ARM designs, and Microsoft Corporation (MSFT) is developing ARM chips for Windows 12 .

Meta Platforms, Inc. (META) doesn't think GPUs are the way to go, so they are developing their own proprietary chips for AI .

So arguably the 5 biggest potential customers for NVIDIA's GPUs are headed away from NVDA. These are companies so large and with so much money they can do whatever they want and they are most likely going to develop their own custom-made AI chips.

Here's a chart that shows the disparity in R&D for all the companies.

With a total R&D spend of $210 billion, the Big 5 can make whatever AI chips they need without buying them from NVDA. And if they do, ARM will most likely be involved in a big way.

Conclusion

Nvidia Corporation is an amazing company and certainly deserves to be considered one of the most promising semiconductor companies in the world.

But with its huge market value, an investor needs to be very cautious going forward.

If you don't want to wait for the ARM Holdings Plc. IPO , you could buy SoftBank stock instead, but SOBKY financials are difficult to parse because they buy and sell subsidiaries every year sometimes for a profit and sometimes for a loss.

It is also possible that with all the AI hype flying around the market, the IPO will be valued much higher than the original Nvidia Corporation offer of $40 billion. ARM had a very good quarter, with total revenue up 28% and licensing revenue up 65% .

The ARM Holdings Plc. IPO would have to be valued at about $90 billion to match Nvidia Corporation's current market cap based on annual revenue.

At this point in time, I find Nvidia Corporation a Hold.

For further details see: