Many investors and consumers around the world has been feeling the effects of what a semiconductor shortage actually means to their everyday lives. This has its rippling effects across markets, even the automotive industry has been disrupted by this shortage. The demand for chips has never been so hot while supplies are so low, the world now looks to the chip manufacturers of the world to create enough supply to satisfy skyrocketing demand.

Semiconductor powerhouse NVIDIA Corporation (NVDA - Get Rating) is one of the world leaders in the chip industry, operating through the Graphics and Compute & Networking segments. Its Graphics segment includes their popular GeForce graphics processing unit (GPU), Quadro/NVIDIA RTX GPUs, and automotive platforms for infotainment systems.

Its Compute & Networking segment includes Data Center platforms and systems for artificial intelligence, high-performance computing, and accelerated computing.

NVDA has borne the brunt of the broad-based tech sell-off and lost more than 45% year-to-date. The sharp rise in the benchmark interest rates has led to a correction in notable tech names commanding higher valuation multiples. 

Despite surpassing the consensus EPS estimate by 5% and revenue estimate by 2.4% in the last reported quarter, NVDA is currently trading 53.9% below its 52-week high of $346.47, which it hit on November 22, 2021.

In terms of forward EV/EBITDA, NVDA’s 28.41x is 138.1% higher than the 11.93x industry average. Its forward P/S of 12.46x is 345.3% higher than the 2.80x industry average. Also, the stock’s 12.40x forward EV/S is 339.3% higher than the 2.82x industry average.

NVDA expects its revenue for the second quarter ending July 30, 2022, to take a $500 million hit due to the ongoing war between Russia and Ukraine and China’s COVID-19 lockdowns earlier this year. Moreover, the company expects its results to be impacted by supply-side constraints.

The stock has declined 20% over the past year to close the last trading session at $159.82.

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

Robust Financials

NVDA’s non-GAAP revenue increased 46.4% year-over-year to $8.28 billion for the first quarter ended May 1, 2022. The company’s non-GAAP net income increased 48.8% year-over-year to $3.44 billion. 

Also, its non-GAAP EPS came in at $1.36, representing an increase of 49.4% year-over-year. In addition, its non-GAAP operating income increased 55% year-over-year to $3.95 billion.

Favorable Analyst Estimates

Analysts expect NVDA’s revenue for fiscal 2023 and 2024 to increase 25.9% and 16.5% year-over-year to $33.89 billion and $39.48 billion, respectively. Also, its EPS for fiscal 2023 and 2024 are expected to increase 22.6% and 19.4% year-over-year to $5.45 and $6.50, respectively. It surpassed consensus EPS estimates in each of the trailing four quarters.

Stretched Valuation

In terms of forward non-GAAP P/E, NVDA’s 30.95x is 75% higher than the 17.68x industry average. Likewise, its 26.24x forward EV/EBIT is 71.3% higher than the 15.31x industry average. And the stock’s 13.14x forward P/B is 247.1% higher than the 3.78x industry average.

High Profitability

In terms of trailing-12-month net income margin, NVDA’s 32.02% is 499.9% higher than the 5.34% industry average. Likewise, its 3.52% trailing-12-month Capex/S is 48.8% higher than the industry average of 2.36%. In addition, its 27.14% trailing-12-month levered FCF margin is 191.9% higher than the 9.30% industry average.

POWR Ratings Reflect Uncertainty

NVDA has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. NVDA has a D grade for Value, in sync with its 34.46x forward Price/Cash Flow, which is 110.3% higher than the industry average of 16.39x.

It has a D grade for Stability, consistent with its 1.59 beta. Furthermore, its higher-than-industry profitability justifies the B grade for Quality.

NVDA is ranked #76 out of 97 stocks in the Semiconductor & Wireless Chip industry. Click here to access NVDA’s ratings for Growth, Momentum, and Sentiment.

Bottom Line

NVDA’s stock has corrected more than 50% from its 52-week high. Despite the correction, the stock is still trading at an expensive valuation. The stock is currently trading below its 50-day and 200-day moving averages of $180.22 and $237.95, respectively, indicating a downtrend.

While its long-term prospects look bright, the stock is expected to see further downside in the near term. So, it could be wise to wait for a better entry point in the stock.

How Does NVIDIA Corporation (NVDA) Stack Up Against its Peers?

While NVDA has an overall POWR Rating of C, you might want to consider investing in the following Semiconductor & Wireless Chip stocks with an A (Strong Buy) and B (Buy) rating: United Microelectronics Corporation (UMC - Get Rating), STMicroelectronics N.V. (STM - Get Rating), and Axcelis Technologies, Inc. (ACLS - Get Rating).

NVDA shares fell $1.70 (-1.06%) in premarket trading Wednesday. Year-to-date, NVDA has declined -45.64%, versus a -19.26% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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