Semiconductors leader Nvidia (NVDA 2.40%) doesn't report its Q1 earnings for another month -- May 25 is the expected date -- but even with the news a full month away, both Wall Street and the media that cover it are worried.
Case in point: Saturday's edition of Barron's warned that "Nvidia's incredible winning streak may soon be coming to an end." And no sooner had it said that than Nvidia stock tumbled in early trading Monday -- down 2% as of 9:45 a.m. ET.
A whole confluence of unfortunate circumstances is adding up to bad news for Nvidia, warns Barron's, ranging from weak cryptocurrency prices discouraging crypto miners from buying Nvidia chips to weak demand for GPUs among video gamers to a simple drying up of liquidity from the Fed's easy money policies, which are now heading in reverse. And heeding that warning, this morning, analysts at Barclays Capital reduced their price target on Nvidia stock to $295 a share.
Barclays doesn't know precisely when all this bad news will start showing up in Nvidia's earnings reports -- maybe 2022, maybe 2023, but probably no later than 2024. By then, the analyst worries we could see chip stock earnings fall by as much as 20% to 40% from today's levels, and thinking long-term, the analyst counsels caution about how much you pay for Nvidia stock given this likely downturn ahead.
I think that's fair advice, and worth considering. Nvidia stock already costs more than 50 times earnings. That's already a pricey multiple given consensus estimates for 21% long-term earnings growth, and it could be downright dangerous if earnings fall 20% to 40%.
Granted, Barclays' warning is something of an outlier. In the field of analysts who cover Nvidia, almost everyone thinks the stock will keep growing earnings strongly -- not just this year ($3.85 per share), but in 2023 (when earnings could grow 15% to $4.43 per share, according to S&P Global Market Intelligence estimates) and 2024 (when analysts see earnings not falling, but rising 34% to $5.92 per share). Indeed, by 2027, the forecast is for Nvidia stock to be earning nearly $9 per share.
My bigger worry is that if Nvidia earns $9 in 2027, that works out to about a 22 P/E...for earnings five years from now. Twenty-two times earnings might be appropriate for a 21% grower earning $9 already today, but if you pay that much today, you're basically assuming Nvidia will grow as expected over the next five years, and giving yourself zero margin of safety if it doesn't.