Nvidia (NVDA 5.27%) had a great start to the year, gaining up to 61% since the calendar flipped to 2023. That kind of movement could have investors questioning whether they have missed the boat on the chipmaker's stock.
So let's look at the company's most recent results and see if the stock has room to run, or if Nvidia has gotten ahead of itself.
Nvidia faces some serious challenges
Nvidia is known for its best-in-class graphics processing units (GPUs), which can create lifelike graphics, crunch numbers, and process calculations extremely fast, making them ideal for multiple uses. Two in particular that Nvidia has capitalized on are gaming and data centers, but while one business has helped Nvidia recently, the other has been a drag.
| Segment | Q4 2023 Revenue | Q4 2022 Revenue | YOY Growth |
|---|---|---|---|
| Data center | $3.6 billion | $3.3 billion | 11% |
| Gaming | $1.8 billion | $3.4 billion | (46%) |
Data source: Nvidia. YoY = year over year. Fiscal 2023 ended Jan. 29.
But one catalyst looks like it has the power to turn nearly every division around: artificial intelligence (AI). Management went to great lengths to tell investors about the many uses of AI during its conference call and how Nvidia's GPUs can power it, whether in a personal computer or at a data center.
But the company has been powering AI applications for years, and the only thing that changed this quarter from previous ones is that AI got a ton of publicity through various chatbot releases.
Over the long term, AI will still be a solid boost for the company. But it doesn't have the power to truly move the needle because it has been a factor for some time.
Overall, fourth-quarter results weren't great, as revenue fell 21% over last year's total. But operating expenses rose 31% year over year. Those two factors combined caused quarterly net income to fall from $3 billion to $1.4 billion, a 53% decline from a year ago.
The lone bright spot was that Nvidia's gross margins were 66.1%, compared to 67% last year. Why is this a big deal? Nvidia had to slash its margins earlier this year to move products and prevent a vast inventory buildup. With its margins returning to normal, it shows that the company doesn't need to discount its products in order to sell them.
Image source: Nvidia.
This will be crucial in 2023, as the weak PC market will likely last throughout the year.
Thus far, I haven't given much positive news for Nvidia, despite its stock rocketing higher this year. Has it gotten ahead of itself?
The stock isn't anywhere close to being cheap
From a valuation standpoint, using an earnings metric is tricky because Nvidia's margins are influenced by external events that the company cannot control. Therefore, comparing its historical price-to-earnings (P/E) ratio to its recent 135 P/E may lead to improper conclusions.
Using its price-to-sales (P/S) ratio, we can normalize some of the current economy's effects, although it isn't perfect because revenue is down due to the chip cycle downturn.
NVDA PS Ratio data by YCharts.
At more than 21 times sales, the stock has a high value. It's rare to see companies sustain that valuation level, even if they are rapidly growing. As Nvidia's revenue streams are currently shrinking, this valuation makes even less sense.
Have you missed the boat on the stock? I'd say yes. Buying at today's valuations is dangerous, as the stock will likely revert to a more reasonable price after the AI hype wears off.
I'm still bullish on Nvidia's long-term prospects, but the current rise is likely unsustainable. Anyone wanting to own shares will probably have more-opportune times shortly.
