In the past year, Nvidia (NVDA -1.50%) has given shareholders quite a roller coaster ride. Since the beginning of 2023, Nvidia's stock has been up over 80%. However, that comes on the heels of a 50% drop in 2022.
With how much Nvidia's stock has risen in 2023, many investors may question if they've missed the move on Nvidia's stock or if there is more room to go, as the stock is still down 18% from its high. So let's look and determine if Nvidia has reached its ceiling.
Nvidia still has one primary product
Nvidia depends on one thing: graphic processing units (GPUs). After all, these pieces of computational equipment don't just make visuals in gaming computers; they can be used to process calculations, run data centers, and create powerful artificial intelligence (AI) solutions.
Historically, Nvidia has been exposed to the ups and downs of the personal computing market. With Nvidia diversifying away into less recession-prone segments like data centers, it levels out the demand cycle. However, Nvidia still derives much revenue from the gaming and cryptocurrency industries (GPUs are utilized to mine cryptocurrency), so Nvidia still feels cyclical effects.
AI is one area Nvidia believes can deliver increased demand for its products. At both the data center and PC levels, Nvidia offers products that can power AI computations. However, Nvidia's latest quarter wasn't the greatest, even with this broad product range.
Nvidia's Q4 wasn't special
During Nvidia's fourth quarter of fiscal 2023 (ended Jan. 29), revenue fell 21%, mainly because its gaming division fell 46% year over year. Nvidia's largest segment, data center, only grew 11% over last year and decreased by 6% compared to the third quarter. This is a big concern for a segment that hasn't historically displayed cyclicality.
To make matters worse, Nvidia's first-quarter guidance was relatively weak, with revenue expected to be $6.5 billion, down 22% from last year.
So why is a stock that is shrinking its revenue up more than 80% this year? In my opinion, the market has gotten way ahead of itself.
With how much hype AI has experienced over the past quarter, Nvidia has been identified as an obvious winner, which is probably a fair assessment. However, Nvidia hasn't executed on this hype yet, even though many investors have already bought in.
Additionally, Nvidia's earnings are going in the wrong way. Net income fell 53% in Q4, which brings its price-to-earnings (P/E) ratio to an absurd level.
NVDA P/E Ratio data by YCharts.
Some critics might point out that using a P/E ratio isn't fair right now because the business is going through a downturn, so earnings won't be optimized. However, even if you utilize the price-to-sales (P/S) ratio, which gives the stock the benefit of the doubt, it's basically around the same levels as 2021, which caused the stock to crash in 2022.
NVDA P/S Ratio data by YCharts.
While I'm bullish on Nvidia's prospects as a company, thanks to its superior GPU technology and exposure to AI, the stock is just too expensive to touch. Trading at 24 times sales makes it expensive for a software stock growing at 50% each year, a ridiculous valuation for a somewhat-cyclical hardware company whose revenue is shrinking.
I'll gladly add more if Nvidia's stock returns to a sane valuation level. But with how the company is executing right now, I think there will be better times to invest in the stock.
