With NVDA Stock Topping Out, It May Be Time to Sell

Stocks to sell

With Nvidia (NASDAQ:NVDA) stock holding steady, is it time to sell? After last year’s epic run, the high-flying chipmaker may be peaking. With Advanced Micro Device’s (NASDAQ:AMD) mixed guidance, investors are starting to scale back their expectations for the other chip names as well.

With NVDA Stock Topping Out, It May Be Time to Sell

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As I’ve discussed in prior analyses for NVDA stock, investors have priced in a lot of upside into the shares. I continue to make the argument that it’s expectation, not underlying value, driving the stock higher. Even as shares soared from around the $150 per share price level in August to their current price around $250 per share.

Yet, NVDA stock may have some catalysts at play to send shares higher, especially as the runaway bull market marches on. But after massive gains in the past 12 months, why not cash out? Taking into account downside risk, holding now to gain a few dollars more per share may not be the best move.

NVDA Stock Running Out of Runway

Nvidia stock looks like its topping out price wise. But could emerging catalysts push shares higher? How about Nvidia’s GeForce NOW cloud-based streaming platform? Previously available only in a beta version, the company opened up membership on Feb. 4.

With GeForce NOW, Nvidia goes toe-to-toe with Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Stadia service. With GeForce NOW’s premium offering having a lower monthly price ($4.99/month) than Stadia’s ($9.99/month), Nvidia could gain significant market share. But, both will see a new competitor later this year, with Microsoft’s (NASDAQ:MSFT) launch of Project xCloud.

With cloud gaming expected to be an $8 billion market by 2025, GeForce NOW could be a material future revenue stream for Nvidia. Yet, you could make the argument that cloud gaming could cannibalize Nvidia’s GPU business. It could also be years until GeForce NOW scales to profitability. Add in competition from big tech peers, and the payoff may not be worth the risk.

While a positive, I don’t see this catalyst doing much for NVDA stock. But, as InvestorPlace’s Vince Martin discussed Jan. 29, recovery of Nvidia’s data center business could move the needle. With Intel’s (NASDAQ:INTC) data center performance exceeding expectations, chances are, Nvidia’s data center business has recovered as well. This could mean Nvidia reports an earning beat, sending shares higher.

Yet, is this already priced into NVDA stock? Needham’s Rajvindra Gill believes so. The analyst is confident in Nvidia’s data center performance. But with concerns about valuation, Gill held back from rating the stock a “buy.” Instead, he raised his rating from “underperform” to “hold” without giving a price target for the stock.

Valuation-wise, NVDA stock is still “cheaper” than AMD stock. But if investors lose confidence in both high-flyer’s future prospects, valuation for both could head lower in the coming year.

Plenty of Room for Multiple Compression

As Nvidia’s business recovered from their 2018 and 2019 low point, NVDA stock benefited significantly from multiple expansion. Shares have doubled since December 2018. Now, shares trade for 34.7 times next year’s earnings. While this is lower than AMD’s equivalent forward multiple (43.4), this is well above Intel’s forward multiple of 14.1.

Yes, Intel does not have the growth opportunities of Nvidia or AMD. But does Nvidia’s projected 19.4% revenue growth warrant such a high multiple? In today market, perhaps. But like so many other big-name stocks out there, it’s an exuberant market, not fundamentals, keeping shares at their current price. While markets remain strong as of this writing, things could turn on a dime.

A recent study from MIT and State Street finds there’s a 70% chance of a recession in the next six months. This could impact NVDA stock both ways. Firstly, by hurting demand for Nvidia’s products. Secondly, a market downturn could put pressure on shares.

If the price-earnings (P/E) ratio of NVDA stock falls to levels seen in the mid-2010s (around 20-times earnings), shares could make a big move downward. Even if Nvidia’s forward PE fell to between 25 and 30, shares would fall to between $180.75 and $216.90 (assuming fiscal year 2021’s projected earnings meet expectations).

NVDA Stock Upside Fails to Counter Downside Risk

There’s no doubting Nvidia’s business is in recovery mode. With likely strength in its data center business, along with the potential of its new cloud gaming platform, Nvidia as a company could continue to grow. Yet, with a high valuation, shares could tumble if market excitement calms down.

NVDA stock is trading well above its PE ratio from earlier last decade. If shares return to that valuation, Nvidia could fall significantly. Weighing this against the sliver of upside from an earnings beat or the success of GeForce NOW, it looks like prime time to sell Nvidia stock.

As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

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