This stock went up 262% in 15 months. Better to sell or buy again?

At the end of May 2022, it was worth 185 dollars. At the time, with the aggressiveness that distinguishes it on the market, we could have defined this company as a stock for a medium-long term drawer period.

The vision has been proven correct. The stock closed on September 1st, 2023, just 15 months after the value above, at $485, with an increase of +$300, i.e. 262% from the initial value on the day the article was drafted.

We are talking about NVIDIA stocks, the largest maker of graphics cards and artificial intelligence chips.

Therefore, a question becomes clear: Is it better to take home the profits or to stay on the stock and not sell?

The answer is quite complex.

The numbers undoubtedly continue to be impressive. But perhaps there is too much euphoria around the title. Yet the enormous development in the use of artificial intelligence by all world companies passes precisely through the cloud systems of Google Cloud, Alibaba Cloud, Amazon Web Service, Microsoft Azure, and so on, which in turn use the architectures of NVIDIA chips, more and more powerful. NVIDIA is the protagonist of AI development.

NVIDIA stocks - 15 months

On August 24th, the company released the data for the quarter that ended on July 30th... and what a show!

The company reported $13.5 billion in revenues, an 88% increase from the previous quarter and 101% from the same quarter a year earlier. The company itself—too conservatively—had forecast revenues of $11 billion for the July 30 quarter, which would have represented a 53% sequential increase.

NVIDIA CFO Colette Kress expects approximately $16 billion in revenues next quarter, up 19% and 170% sequentially from $5.93 billion in the third quarter of the fiscal year 2023.

However, by traditional valuation measures, NVIDIA is expensive.

The shares closed last Friday at $485, up 222% for 2023 excluding dividends. Based on this price, the stock traded on Friday at 34 times the consensus estimates for earnings per share for the next 12 months (earnings estimates by analysts polled by FactSet).

The stock traded at 19.6 times consensus sales-per-share estimates for the next 12 months.
By comparison, the S&P 500 SPX’s end-2024 price-to-earnings ratio was 18.6X and its estimated 2024 price-to-sale estimate was 2.3X, also as of last Friday’s close.

But this price-earnings multiple, although very high compared to the market in general, is in line with that of the shares of Amazon or of Adobe Inc. and Microsoft Corp., even if these estimates by NVIDIA should prove to be even more cautious compared to the actual numbers that will actually be reached in 12 months. In short, this 2023 euphoria belongs not only to NVIDIA but to the entire world of AI-related companies.

Indeed, according to Ben Reitzes, an analyst at Melius Research, NVIDIA’s shares are cheaper than those of Alphabet Inc., Microsoft, and Apple Inc. when considering other multiples, such as the EV/EBITDA ratio. What is that? In a nutshell, if I read the company’s financial statements and add the stock market capitalization + net debt - the cash register, I get the so-called EV = Enterprise Value, the enterprise value. If I divide EV by EBITDA (i.e. gross margin) I get enterprise value versus earnings before interest, taxes, depreciation, and amortization. The higher this ratio is, the more expensive the company is compared to the gross profits it is able to produce. In this case, i.e. considering the EV/EBITDA metric, then NVIDIA would be even cheaper than the above stocks.

Looking at the progression and growth rate of earnings and revenue NVIDIA is a phenomenon. The question investors are asking is whether or not it is too late, still today, to stock up on the company’s shares. It shouldn’t be, even in light of Tesla’s history of sales growth since the introduction of the Model 3 in 2017. But NVIDIA’s story is profoundly different from the electric car maker, as the purchase of its expensive processor units graphics, or GPUs, supports a wide range of industries that are upgrading their computer systems to implement artificial intelligence technology. This growth in the use of AI is only in its infancy and is bound to permeate all aspects of our future lives, and companies that do not use it will fall behind the others and will be forced out of the market because they are no longer competitive.

NVIDIA makes big money and will make it again in the next few years: in the last quarter, the company’s gross margin was 70.93%, improving on the already impressive 43.48% a year earlier. Conversely, the company’s operating margin for the quarter was 54.06%, up from 13.08% a year earlier. According to FactSet, when compared to the market, the S&P 500’s second-quarter gross margin was 32.68%, down from 33.32% a year prior, while its operating margin was 14.71%, down from 15.71% a year earlier.

To understand how NVIDIA is on another planet than the SP500 it is useful to specify the terms above.

A company’s gross margin is net sales, minus the cost of goods or services sold, divided by net sales. The latter are sales minus returns and discounts, such as coupons. The cost of goods or services sold includes the actual costs of producing the items or providing the services, including labor. A company’s operating margin is earnings before interest, taxes, depreciation, and amortization (EBITDA) divided by revenue.

In NVIDIA’s case, the high gross margin underscores the company’s pricing power, as its founder and CEO Jensen Huang pointed out in the earnings press release. NVIDIA has high pricing power because its customers are highly dependent on its products and the company has few competitors able to produce with the same quality standards and at the same price.

“During the quarter, our major cloud service provider customers announced the purchase of massive NVIDIA H100 AI infrastructure, including through intra-company partnership agreements, to bring Nvidia’s AI technology to every sector of human life,” Chief Executive Huang said at the press conference.

Even graphically, if we look at the Bloomberg chart at the beginning of the article, the stock travels abundantly above its MM200d, equal to $295, i.e. above its long-term trend, and steadily above its MM50d, equal to $445, which is the short-term trend line, with rallies characterized by large trading volumes, confirming that violent bullish movements are supported by large investor participation.

So to the initial question - "Is it better to take home the profits or to stay on the stock and not sell?" I answer in two ways:

• Do not sell if you have a long-term attitude, because if you remain loyal to this company, with the exponential development of the use of AI worldwide in the next 10 years, the stock can reach $1,000 in 3-4 years from today;
• If you are an avid trader, who loves fast and impulsive trading, then I would say that it is appropriate to sell and then re-enter the stock as soon as the opportunity arises (for example if a market reversal occurs in September which would lead NVIDIA close to MM50GG of $445 ($40 less than Friday’s closing price).

Further market declines that would bring the stock close to the MM100gg - which is the medium-term trend highlighted by the green line at $385 - would undoubtedly be strong entry levels. But be careful, do not sell the whole position, but only 50%, because if these transfers are not made, and instead you have already sold 100% of the position, then you risk biting your hands and seeing the stock continuously rising and without having had the possibility of returning.

|DISCLAIMER
The information and considerations contained in this article should not be relied upon as the sole or principal aid in making investment decisions. The reader maintains full freedom in his own investment choices and full responsibility in making them since he alone knows his propensity for risk and his time horizon. The information contained in the article is provided for information purposes only and its disclosure does not constitute and should not be considered an offer or solicitation of public savings.|

Original article published on Money.it Italy 2023-09-05 07:56:00. Original title: Queste azioni sono salite del 262% in 15 mesi. Meglio vendere o comprare ancora?