Nvidia Stock May Be Near Its Peak As Revenue Growth Slows (NASDAQ:NVDA)

BING-JHEN HONG If analysts’ estimates for future sales growth are correct, then Nvidia Corporation’s (NASDAQ:NVDA) will likely see a period of sharp multiple contraction. This isn’t to imply that the company’s revenue won’t continue to grow, but history shows that investors are willing to pay more for faster growth and less for slower. Analyst estimates suggest that Nvidia’s revenue growth has already peaked, which probably means that its price-to-sales multiple is at or near a peak. Once the growth rate peaks, the price-to-sales multiple tends to contract, and we have seen this happen many times in the past. Bloomberg Tesla While it seems highly probable that Nvidia’s revenue will continue to move higher, this doesn’t mean that the stock price will continue to rise. That is because as growth slows, one would expect the price-to-sales ratio to fall. We have seen this with companies like Tesla (TSLA), which saw huge multiple expansions in 2020 and 2021, when the revenue growth rate was rapid, and then saw multiple contracts as the growth rate fell. Bloomberg Netflix We have seen the same with Netflix (NFLX), with its price-to-sales multiple rocketing higher in 2017 and 2018 and for the multiple to contract until bottoming in 2022 as revenue growth plunged. However, as revenue growth expands, the price-to-sales ratio rebounded. Bloomberg Nvidia We have actually seen the same thing happen with Nvidia a few times in the past. In the 2017 and 2018 cycles and in the 2020 and 2021 cycles, both cycles saw a significant dip in the revenue growth rate until a new cycle started, and then the growth rate and the multiple recovered. If the current revenue growth rate has now peaked and is due to turn lower as consensus analysts project, it would suggest that the multiple begins to come down. Bloomberg What will Nvidia’s stock look like with a price-to-sale metric when growth is perhaps closer to 10 or 20%? It’s hard to say, but if the price-to-sales multiple stays around 20 times and revenue grows to $180 billion in 2027 based on current estimates, the market cap could reach around $3.6 trillion. This suggests very little upside in the shares from current levels based on its nearly $3.3 trillion current market cap. If the stock returns to its historical peak of around 10 to 12 times sales, it will be a company worth $1.8 trillion to $2.16 trillion, a roughly 35% to 45% decline in value. If it should go to 2 times sales, such as in 2019 and 2022, then that is a company worth only $400 billion. Cisco Systems This essentially happened to Cisco Systems (CSCO) in 2000, when its growth rate slumped, and its multiple collapsed from 63 to around 5. Bloomberg This is despite Cisco’s revenue growing from a peak of around $27 billion in early 2001 to around $55 billion today. Market sentiment around the stock and sector just changed, and as more products came to market, the sector, in essence, became commoditized. Bloomberg It isn’t to say the same happens to Nvidia, but many cases illustrate that investors are just willing to pay more for a stock when the sales growth rate is high, and then as that growth falls, the multiple contracts. Nvidia today seems to be following many of the same patterns the stock has followed in the past; it is just that today’s revenue growth is greater than the two previous cycles. Nvidia’s growth rate can’t continue at the current pace forever. The growth rate will slow as the revenue numbers get bigger, which means that the price to sales multiple will contract. If growth has turned the corner, it could be very likely that the valuation is close to a peak, and as that growth rate falls, the price-to-sale multiple falls with it.Join Reading The Markets Reading the Markets helps readers cut through all the noise, delivering daily video and written market commentaries to prepare you for upcoming events.We use a repeated and detailed process of watching the fundamental trends, technical charts, and options trading data. The process helps isolate and determine where a stock, sector, or market may be heading over various time frames.