1 AI Stock to Sell Before It’s Too Late

AI stocks have surged in 2023, and few have benefitted as much as chip manufacturing giant NVIDIA (NASDAQ:NVDA). After surging to highs of over $330 per share in late 2021, NVIDIA shed much of its value during the tech selloff of 2022.

Now, the stock has recovered much of that lost ground. The problem, however, is that these rapid gains may have left the stock overvalued and created a limited opportunity for investors to sell at excessively high prices.

Is Nvidia the AI stock that is overvalued?

NVIDIA Earnings Fell 52%

In 2022, NVIDIA’s revenues remained essentially flat at $27.0 billion. The end of the year was much more negative, however, with Q4’s revenues down 21 percent from the previous year. On a GAAP basis, earnings per share fell 52 percent. Non-GAAP earnings fared little better, falling 33 percent against 2021’s numbers.

Even more concerning was the contraction of NVIDIA’s gross margin, which fell 8 percent in 2022. Although gross margin was still nearly 57 percent, this sharp reduction could be the beginning of a negative trend for NVIDIA’s profitability. Operating income also fell 58 percent. The company’s total return on equity, however, was a reasonably healthy 26.6 percent.

There were some bright spots for NVIDIA last year, pointing to NVIDIA’s continued potential for growth. Data center revenue, for instance, rose 41 percent year-over-year. Revenue from embedded systems was up 60 percent, potentially representing a key driver of future growth for the company. The key gaming segment, though, was down 27 percent.

In the coming 12 months, analysts expect to see NVIDIA’s earnings grow by more than 40 percent. Over the next 3-5 years, that growth rate is expected to drop to about 30 percent. This high rate of expected growth may go some way toward justifying the current price of NVIDIA, but it also seems to represent a best-case scenario. If NVIDIA proves unable to maintain these high growth rates, the market could revalue the stock at a considerably lower level.

Sentiment for NVIDIA Bullish

Despite the company’s struggles, analysts remain broadly bullish on NVIDIA. The stock maintains a buy rating from 29 of the 47 analysts covering it, and only one analyst has issued a sell rating. Analysts forecast $298.50 over the next year, 11.4 percent higher than the current price of $268.02.

NVIDIA’s valuation, however, tells a rather different story. Thanks in large part to a surge of more than 80 percent YTD in 2023, NVIDIA appears to be substantially overvalued. The stock currently trades at nearly 60 times forward earnings and 24.5 times sales.

Even more worrying is NVIDIA’s price-to-earnings-growth ratio of nearly 3.5, which is a strong indicator that the stock is overvalued. Further evidence for overvaluation is provided by the fact that NVIDIA trades at over 85 times cash flow.

A discounted cash flow analysis suggests that NVIDIA’s fair value at this time would be roughly $197. If the market corrects to this valuation, investors who buy at today’s prices would lose more than 35 percent of their capital. This potential downside likely makes NVIDIA far too risky for most investors.

Will The AI Hype Train Derail NVIDIA?

Beyond fundamental overvaluation, NVIDIA is also exposed to a host of other risks investors should be aware of.

First and foremost among these is the fact that NVIDIA appears to have gotten caught up in a general market trend of overhyping AI-focused stocks. This trend began earlier in 2023 when the success of ChatGPT prompted investors to pour huge sums of money into tech stocks with AI exposure. Such trends rarely have staying power, and there is a significant chance that AI stocks will experience a shakeout within the next year.

Geopolitical risks could also hamper NVIDIA’s long-term growth. The United States has restricted the company from selling certain AI chips to China in an effort to keep strategically important technologies out of the hands of the Chinese government. This policy could make it difficult for NVIDIA to take full advantage of foreign markets.

NVIDIA could even face stiff competition from other manufacturers within the increasingly lucrative AI and semiconductor businesses. AMD and Intel are currently behind NVIDIA as GPU providers, but both companies could mount real challenges to the market leader as competition heats up.

Finally, NVIDIA is experiencing a worrying trend of insider selling. In the last 12 months, insiders have liquidated nearly $100 million worth of NVIDIA stock and purchased none. This suggests that current management may have little confidence in the company’s ability to justify its present valuation through future growth.

What AI Stock Is Overvalued?

While NVIDIA is still a business with a great deal of growth potential left in it, the stock seems to be considerably overpriced at the moment. Despite ongoing bullishness from analysts, NVIDIA’s sky-high price relative to its current cash flow is a red flag that investors should be well aware of when making decisions about this stock.

Even with renewed interest in AI technology and steadily growing demand for semiconductors, NVIDIA seems unlikely to generate the growth needed to justify its price. Coupled with the substantial business risks the company currently faces, this fact seems to make a fairly strong argument for selling NVIDIA while its price remains elevated.

With that said, there’s still a decent amount to like about NVIDIA. The company is the undisputed market leader in GPUs, and it likely has considerable room for growth in its data center and embedded systems segments. NVIDIA appears to be a classic case of a good business that likely represents a poor investment due to its excessively high price.

Although some especially risk-tolerant investors may choose to hold NVIDIA in hopes of future price improvements, the stock seems to be a sell at the moment. Investors have the opportunity to sell at overvalued prices today, allowing some to limit their losses and others to lock in respectable gains.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.