If any company is a darling on Wall Street in 2023, it’s definitely Nvidia (NASDAQ:NVDA). Analysts scrambled to lift their ratings and price targets on NVDA stock after its spectacular rally this year. Now, a call for clear-minded thinking is needed as a major near-term event could shut the party down.
There’s no disputing that Nvidia will benefit from the demand for artificial intelligence (AI) chips. But then, the highly efficient market already knows this.
As earnings season presses forward, Nvidia has high expectations to live up to. It would be a shame if overeager investors lost their shirts because Nvidia couldn’t meet the Street’s lofty expectations. So, consider being safe instead of sorry.
NVDA Stock in 2023 vs. CSCO Stock in 2000
The problem is, many of today’s financial traders didn’t experience the dot-com bubble of 2000. Back then, the market was hyped up about the rise of the internet, much like investors are ultra-bullish about AI today.
And much like Nvidia provides the infrastructure for generative AI with its GPUs, Cisco Systems (NASDAQ:CSCO) supplied crucial infrastructure for the internet (switches, routers, etc.) in 2000. The internet did indeed become part of the fabric of modern technology, and the same thing could happen with generative AI.
Yet, folks who bought CSCO at $80 in 2000 were undoubtedly horrified to watch it crash to the $10 area. Even today, the Nvidia share price is substantially below $80.
Nvidia is giving me a sense of dejavu as it currently has a trailing-12-month price-to-earnings (P/E) ratio of 226.25x, versus the sector median P/E ratio of 24.9x. Thus, valuation concerns prompted me to issue a warning about NVDA stock not long ago, and I’m sticking to my profit-taking recommendation now.
Aug. 23 Could Be Doomsday for Nvidia
People on Wall Street love Nvidia, and as a contrarian investor, I’m concerned about this situation. The Nvidia share price was recently lifted to $575 by Susquehanna analysts, as well as to $600 by Citigroup analysts and also to $600 by Barclays analysts. They’re practically climbing on top of each other to praise Nvidia in 2023.
It’s not difficult to find examples of this. Bernstein analysts foresee “Nvidia’s numbers sustaining, and likely heading higher, for quite some time to come, at least the next 12-18 months.” Meanwhile, UBS analyst Timothy Arcuri dubbed Nvidia a “kingmaker” among AI chipmakers.
And, with Nvidia set to report its second-quarter 2023 earnings results on the morning of Aug. 23, the expectations are lofty. For example, Morgan Stanley analysts recently called NVDA stock a “top pick” and anticipate a “meaningful beat and raise quarter” for Nvidia.
That’s where my alarm bells go off. Nvidia has a high bar to clear as analysts predict Q2 2023 earnings of $2.08 per share. To provide some perspective, in the first quarter, Nvidia earned $1.09 per share. Moreover, in 2022’s second quarter, the company only earned 51 cents per share.
NVDA Stock: You’ve Been Warned
High hopes, especially when they’ve already been priced into a stock, are a recipe for disaster. With so much hope and hype surrounding Nvidia today, the company will have to over-deliver in its upcoming earnings report.
That’s a lot to ask from Nvidia. The bottom line is, if you’re currently profitable as an NVDA stockholder, consider taking profits before Aug. 23. And if you’re not an Nvidia shareholder, I recommend waiting to see if the stock price drops post-earnings-announcement.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
