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At $550, Nvidia Is Just Way Too Costly to Justify

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At $550, Nvidia Is Just Way Too Costly to JustifyIt has been a fantastic year for big capitalization tech stocks. And even among that distinguished group, Nvidia’s (NASDAQ:NVDA) results have been noteworthy. NVDA stock is 182% over the past year, and 97% over the past six months.
Source: Antonio Baccardi / Shutterstock.com

However, after a scorching run in recent years, it’s hard to see how the party can continue. Even with Nvidia doing everything right on a corporate level, the stock has simply gotten too far ahead of the underlying business.
It’s important to remember that a stock and a company are two distinct things. Regardless of how great the company is right now, NVDA stock has become a gamble due to its lofty valuation.InvestorPlace – Stock Market News, Stock Advice & Trading Tips
Yes, I realize there’s excitement around a potential deal to acquire Arm Holdings, a leading semiconductor design firm. But even that wouldn’t change Nvidia’s outlook materially in the near-term. Here’s why.
Arm Won’t Lift NVDA Stock Enough
The issue with the potential Arm acquisition deal is this: it’s just not big enough.

7 Value Stocks To Buy in an Overvalued Market

That may sound weird. After all, Nvidia is offering $40 billion for Arm. But, put it in context. Nvidia now has a market capitalization of almost $350 billion. A $40 billion deal — while impressive — is only a fraction of NVDA’s current valuation. And Arm is not without its risks, either.
A clear leader within its industry, Arm’s focus on artificial intelligence is promising. It’s a natural fit with Nvidia’s own priorities, and the company could undoubtedly jump-start Arm’s business.
But Arm has also been struggling in recent years. Softbank (OTCMKTS:SFTBY) purchased Arm for a little under $32 billion back in 2016. Since then, it has floundered. The company has failed to turn its technical achievements into commercial success.
While Arm could be an incremental benefit, a floundering asset of this size won’t significantly change Nvidia’s fortunes.
Too Big Too Succeed?
Simply put, there are limits to growth. And NVDA stock is about to hit some of them — at least in the short run. The company already became one of the world’s largest semiconductor firms earlier this year. From that high vantage point, it’s worth asking just how much farther the stock can realistically go.
Nvidia has returned to earnings and revenue growth this year. But it’s also worth remembering that Nvidia’s revenues for fiscal year ’20 (which ended early this year) dropped 7% and GAAP (generally accepted accounting principles) earnings per diluted share dropped 32%.
Fiscal year 2021 will see a solid pick-up, with earnings of $9 per share, according to analyst estimates. However, growth will be moderate going forward, with a forecast in the 20% range for the next five years.

And that simply isn’t impressive enough for a stock that is already over $550. It’s one thing to grow exponentially when you’re a small company. But when you’re already the king of your sector, it gets harder to justify an inflated valuation.
Corrections Are Inevitable
Even with Nvidia’s incredible run over the past five years, it’s important not to forget the painful corrections along the way. With the Bitcoin crash in 2018, Nvidia’s graphic card sales slowed when the demand for cryptomining units slid. That loss of momentum came unexpectedly, and resulted in a crushing blow.
In a three-month period in late 2018, NVDA stock lost more than half its value from peak to trough. It took the company until early 2020 to reclaim the ground in lost in that frantic three-month sell-off.
I bring this up because it’s important to remember that — despite Nvidia operational success — it’s earnings are not impenetrable to hiccups. This always happens with growth companies, sooner or later.
And when you’re selling at 52 times forward earnings, and the stock price has more than doubled over the past 12 months, you’re not giving yourself much room for error. In Nvidia’s case, the stock was trading at $250 at the start of 2020. Now it’s at over $550. Would it be a shock if Nvidia’s shares fell back to $400? That’d still be a huge gain for the year. But for anyone buying shares today, it’d be a massive setback.
The Verdict
Nvidia is having a tremendous run, both in its stock price and its business fundamentals. However, the former has far outstripped the latter. Since 2016, Nvidia’s revenues are up a little more than 100%, operating profit has tripled, and earnings are up five-fold. That’s all incredible stuff.
However, NVDA stock is up about 1,700% over the same stretch. That’s simply way ahead of the company’s growth. Nvidia’s market cap has now swollen so much that even a $40 billion acquisition hardly moves the needle. If you are a long-term investor that intends to hold onto Nvidia forever, that’s one thing. But for traders, you’ll almost certainly see much lower NVDA prices over the next year or two.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
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The post At $550, Nvidia Is Just Way Too Costly to Justify appeared first on InvestorPlace.


Lyron Foster is a Hawaii based African American Musician, Author, Actor, Blogger, Filmmaker, Philanthropist and Multinational Serial Tech Entrepreneur.

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This Platform Uses Analytics to Help You Find the Best Real Estate Investing Opportunities

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They say the best investment on Earth is earth, but real estate is a risky business. While it’s undoubtedly a lucrative form of investment, your success isn’t guaranteed unless you play your cards right and study the field with utmost scrutiny.

It pays to have tools that can help you with the process and reap profits, and luckily, there’s one platform that can help you on that front: Mashvisor.

A one-stop site to find traditional or Airbnb properties worth investing in, Mashvisor uses automation to assist you in identifying potential investments within mere minutes. Instead of having you pore over spreadsheets and spend months on tedious research, it leverages technology, real estate data, and analytics to shorten the process to identify the best investment opportunity for you.

Here’s how it works:

Just key in any city of interest, and you’ll immediately receive an overview of the investment opportunities within that area. You’ll get the lowdown on the kind of returns a property will be able to provide, as well as the things you’ll need to do to outperform the rental market. Plus, thanks to the interactive filters available, you’ll also get other pertinent data, including sales history, tax history, market performance, occupancy rates, and many more.

Real estate investing doesn’t have to be tough. For a limited time, you can grab a lifetime subscription to Mashvisor for only $39.99 — 97% off the usual cost of $1,499.

 


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Meeting the reskilling challenge

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Good morning.

If there is one issue that motivates CEOs at the forefront of the stakeholder capitalism movement, it is training and upskilling. They see the dangerous fissures that exist between the highly educated and the less so—a gap that widened during the pandemic. And they understand that technological change is driving that gap ever wider. While the pandemic, racial injustice and climate change may get more attention from society at large, it’s the reskilling challenge for which CEOs feel most directly responsible.

Deanna Mulligan, who is stepping down as CEO of Guardian Life Insurance at year’s end, is one of those CEOs, and she has put her passion into a new book out next week: Hire Purpose: How Smart Companies Can Close the Skills <em>Gap. I spoke with Mulligan earlier this week, and she told me about her evolution on the issue.

Mulligan joined Guardian in 2008, in the midst of the Great Recession. Guardian “wasn’t wildly impacted by the recession, but I was looking around and seeing so many of my friends losing jobs.” When she became CEO in 2011, she realized a combination of pervasive low interest rates and technological change was going to drive huge disruption for her company and her employees. “I said to myself, I don’t want to be one of those companies that has to turn all these people out on the streets.”

She started a program to teach people in the company’s call centers to write code, teamed with General Assembly to teach actuaries to be data analysts, and developed a program of “train in, train out”—providing two years tuition at a local community college for workers whose jobs were eliminated.

“Companies have an obligation to society to try and do this,” she said. “And it’s less expensive than firing people.” Like a number of her CEO colleagues, she is committed to extending such programs beyond her own employees. “It’s very important that we do this at scale.”

We’ll be talking about this topic more on Monday, at the annual meeting of the Fortune CEO Initiative. Mulligan will be there, along with a great group of CEOs. A partial list: Vas Narasimhan of Novartis, Mark Schneider of Nestle, Aneel Bhusri of Workday, Michelle Gass of Kohl’s, Francesco Starace of Enel, Tiger Tyagarajan of Genpact, Jim Fitterling of Dow, Julie Sweet of Accenture, Enrique Lores of HP, Antonio Neeri of HPE, Kevin Sneader of McKinsey, Joe Ucuzoglu of Deloitte, and Sonia Syngal of Gap. Ford Foundation President Darren Walker also will join, along with two U.S. governors who have been working on the retraining challenge: Maryland’s Larry Hogan and Rhode Island’s Gina Raimondo.

More news below.

Alan Murray
@alansmurray

alan.murray@fortune.com

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Debate night was a tamer affair, as are stock markets today

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This is the web version of the Bull Sheet, Fortune’s no-BS daily newsletter on the markets. Sign up to receive it in your inbox here.

Happy Friday, Bull Sheeters. There’s still no progress on a stimulus deal, but there’s plenty of economic data, corporate and political news to focus on.

On that note, we’re a mere eleven days to the presidential election. More than 47 million Americans have already voted. That’s a record.

Meanwhile, U.S. futures have been trading sideways all morning. Stock gains have been muted for much of the past two weeks as investors brace for the likeliness there won’t be a stimulus deal before Election Day.

Let’s check in on the action.

Markets update

Asia

  • The major Asia indexes were mostly higher in afternoon trading with Japan’s Nikkei up 0.2%.
  • Not long ago Chinese startup Renrenche was a darling, fetching unicorn valuation status and a roster of bluechip investors, including Goldman Sachs. Now it may need to sell its core asset for little more than 1,200 bucks.
  • Goldman Sachs is hoping to finally put the 1MDB bribery scandal behind it after agreeing to pay nearly $3 billion in fines to settle the affair that started a decade ago in Malaysia. The settlement “includes the highest penalty ever under the Foreign Corrupt Practices Act,” Bloomberg reports.

Europe

  • The European bourses were flat at the open. And then Germany reported better than expected manufacturing data, lifting the euro and stocks. The Europe Stoxx 600 was up roughly 0.5% two hours into the trading session.
  • Economists now predict the ECB will boost monetary stimulus by a further €500 billion—bringing the total to €1.85 trillion ($2.18 trillion)—as soon as next month to keep the COVID-stricken economy from falling into a deep recession.
  • Daimler shares were up 1.7% in mid-morning trade after the carmaker revised upwards its full-year forecast thanks to solid growth in China.

U.S.

  • U.S. futures are in the red. That’s after the three major indexes eked out gains yesterday in incredibly volatile trade.
  • In premarket trading, Gilead Sciences shares were up as much as 7% after its remdesivir got FDA approval to treat COVID-19. As Fortune‘s Sy Mukherjee notes, remdesivir is “not a save-all” treatment, but the regulatory approval is significant.
  • Shares in Tesla are flat in pre-market trading after a modest bump yesterday. Investors cheered the latest profit beat, but doubts linger over whether that will be enough to vault the EV maker into the S&P 500.
  • Looking ahead: we get the latest batch of manufacturing data before the bell. Let’s see if it can match today’s rosy German numbers.

Elsewhere

  • Gold is up, trading just above $1,910/ounce.
  • The dollar is down.
  • Crude is down. Brent continues to trade just above $42/barrel.

***

By the numbers

13K

We don’t talk often about Bitcoin and its ilk here on Bull Sheet, if only because there’s so much to say about equities and other asset classes. But cryptocurrencies are on a tear at the moment, and worth talking about today. Yesterday, Bitcoin hit a 16-month high, topping $13,100, after PayPal announced it would let users buy a handful of cryptocurrencies, including Ethereum and Bitcoin. As Fortune‘s Bitcoin specialist Jeff John Roberts notes, “Bitcoin is notoriously volatile (though considerably less so than during its early days), and it is often hard to identify single factors that explain price swings. While this week’s surge was almost certainly spurred in large part by the PayPal news, there may be other tailwinds driving the price up.” One theory is that investors are souring on the gold trade, and hopping on the crypto bull run.

-130.54

The Dow Jones Industrial Average closed yesterday at 28363.66—that’s a loss of 130.54 points (-0.4%) over the past five trading days. The stimulus rally continues to show signs of running out of gas. The three major exchanges have been trading in a tight range for much of the past two weeks—going sideways.

5 vs. 495

We’ve talked a lot here about the incredible 2020 bull run for the S&P Five, a.k.a., the FAAMG—Facebook, Apple, Amazon, Microsoft, Google—stocks. Their dominance appears locked in for quarters—and perhaps years—to come as they are not just out-growing the pack, they’re also out-investing the pack. According to Goldman Sachs, the cash-rich FAAMG quintet have a sizable edge in Capex and R&D spending, suggesting they’re sinking big sums into longterm bets while the laggards pull back. It also helps that FAAMG stocks are well ahead in plowing cash into buybacks and dividends, helping driving up their stock prices.

***

Have a nice weekend, everyone. I’ll see you here on Monday. 

Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com

As always, you can write to bullsheet@fortune.com or reply to this email with suggestions and feedback.

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