Nvidia (NASDAQ:NVDA) delivered impressive Q3 earnings last week, surpassing both revenue and earnings expectations and reinforcing its leadership in the AI chip industry. However, despite this strong performance, the market’s elevated expectations remained unmet, leading to a nearly 7% decline in the company’s shares since the announcement.
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This reaction highlights the challenges of maintaining momentum after a staggering rise – Nvidia’s stock surged 175% in 2024 alone. Trading at 50 times earnings, the shares reflect investor anticipation of consistently extraordinary growth, leaving little room for anything less than perfection.
Top investor Jonathan Weber advises caution in this environment, citing the risks posed by elevated expectations and the stock’s rich valuation.
“Nvidia remains a high-quality company, growth is slowing down, and shares remain pricey — which could mean that waiting for a better buying opportunity is a good idea,” asserts the 5-star investor, who is in the top 2% of TipRanks’ stock pros.
Weber points out that Nvidia’s slowing growth shouldn’t come as a surprise; given its scale, sustaining triple-digit growth rates indefinitely is unrealistic. Additionally, the investor highlights that gross margins appear to have peaked at 75%. While still strong, this implies that the previous pace of white-hot growth is not on the horizon.
“With gross margins not growing right now, earnings growth will be lower than it was in the past, when gross margin expansion was a tailwind for profit growth,” Weber notes.
As a further demonstration of how the vast numbers will weigh down growth, the investor looks at NVDA’s Q4 revenue guidance of $37.5 billion. Even if the company were to repeat its Q3 performance and outpace its guidance by $2.5 billion, revenues of $40 billion would only be up 14% quarter-over-quarter.
“While a quarter-over-quarter growth rate in the low-teens is quite attractive, it would still be lower than Nvidia’s growth in the recent past, which would be aligned with a ‘growth slowdown’ trend,” explains Weber.
In light of these dynamics, Weber has assigned Nvidia shares a Hold (i.e. Neutral) rating. (To watch Weber’s track record, click here)
Wall Street analysts, however, take a more bullish stance. With 40 Buy and just 4 Hold ratings, Nvidia enjoys a Strong Buy consensus. NVDA’s average price target of $174.87 suggests ~29% upside from current levels. (See NVDA stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured investor. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
