Every now and again, a company reports a quarter that blows everyone's socks off. Nvidia's (NVDA -3.66%) latest results fit this description perfectly, although the key focus of its report was its outlook.
AI (artificial intelligence) is a crucial driver of this optimism, but is it enough to buy the stock? Let's find out.
The actual results from Q1 weren't spectacular
Before this quarter, Nvidia struggled to drum up demand for its graphics processing units (GPUs) thanks to a weak PC market. This headwind is still raging, as GPUs used for crypto mining and gaming continue to struggle -- gaming revenue was down 38% to $2.24 billion in Q1 of FY 2024 (ending April 30).
However, the company's saving grace has been its data center GPUs, which were already in heavy demand thanks to trends like cloud computing. Additionally, this is the segment that includes most GPUs used in AI creation, research. In Q1, this segment was up 14% to $4.28 billion.
Altogether, Nvidia's revenue actually fell 13% to $7.2 billion. But that wasn't the focus of these results; its guidance was.
Nvidia guided for an astounding $11 billion in revenue for Q2, which implies year-over-year growth of 64%. Additionally, it would top Nvidia's best quarterly revenue mark by $2.7 billion, or 33%.
NVDA Revenue (Quarterly) data by YCharts
The reason for this guidance? You guessed it -- AI.
On Nvidia's conference call, CFO Colette Kress noted that:
We expect this sequential growth to largely be driven by data center, reflecting a steep increase in demand related to generative AI and large language models. This demand has extended our data center visibility out a few quarters, and we have procured substantially higher supply for the second half of the year.
So not only is this impressive guidance applicable for Q2, but it also will have a similar effect throughout the rest of FY 2024.
News of this demand increase sent shares up 27% the next day, making Nvidia's stock even more expensive. But is it worth buying at these prices?
Nvidia's stock is mind-bogglingly expensive
Prior to Nvidia's quarter, the stock was trading at an ultra-expensive 30 times sales. After the release of its last quarter report, that valuation spiked to 37 times.
However, the market is a forward-looking machine, and we've already discussed how Nvidia's demand has shot through the roof thanks to generative AI demand. So to more accurately assess the stock's valuation, we need to look at forward metrics.
To give Nvidia the benefit of the doubt, I'm going to assume it can grow its trailing 12-month revenue consistently by 64% (the Q2 growth guidance). That means it could grow its $25.9 billion revenue stream to $42.5 billion. Even after that growth, the stock would still trade for 23 times sales.
That's still a very pricey valuation, and it's not a guaranteed revenue stream either, as it hasn't occurred yet.
As a result, I still think Nvidia isn't a buy. While the market is bidding up the stock now, it eventually reverts to its historical average valuations. This isn't the first time Nvidia has reached sky-high valuations; each time, it ended poorly (just look at how Nvidia did from November 2021 through 2022).
Nvidia is a fantastic company with innovative technology, but if the stock trades at too rich of a premium, the potential for market-crushing returns is absent, which is why I'm passing for now.
