Despite beating earnings last night, computer memory maker Micron Technology (MU -0.74%) released weak guidance for the coming quarter -- earnings as much as 45% below what Wall Street is expecting. That news sent Micron shares plummeting 6% and spaked a series of downgrades and price target reductions on Wall Street.
What was it that Micron said that's spooking investors in Nvidia?
Demand for computer memory has "weakened considerably in a very short period of time," warned Micron last night, as soaring inflation, a still partially shut-down Chinese economy, and waning demand from pandemic-era work-from-homers combine to sap demand for everything from PCs to tablets to smartphones. "The extent of the shift has definitely been bigger than anyone was anticipating," added Micron Chief Business Officer Sumit Sadana in a company statement.
Analysts commenting on Micron's forecast observe that there's now a glut of tech hardware out there, with Needham & Co. for example opining it may take as much as six months to "burn off the excess inventory" and put semiconductor demand back on a strong growth path. And what this means for Nvidia, basically, is that analysts' ambitious forecasts for Nvidia revenue to grow 61% this year may prove overoptimistic -- and even forecasts for slower 26% sales growth next year could be at risk.
How bad is this news for Nvidia shareholders? Consider: Currently, Nvidia stock is selling for about 40 times trailing earnings of $9.5 billion. That valuation already looked stretched based on consensus analyst five-year targets of 21.5% compound earnings growth. But if Micron's earnings warning means earnings growth elsewhere in the semiconductor sector is also at risk, Nvidia could be even more overvalued than it looks.
When you consider furthermore that Nvidia's quality of earnings isn't looking great right now, with actual free cash flow backing up only about 83% of reported net earnings, there's a good case to be made that Nvidia stock is still overvalued even after being cut in half this year. For a growth stock leader that delivered 460% profits to its shareholders from the start of 2020 through its peak price last November, that may come as a shock.
But the math doesn't lie: Nvidia stock still looks overpriced.