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Don't Push the Panic Button on NVIDIA on a Dip

- By Sangara Narayanan

NVIDIA (NVDA) moved from just being a growth story to a hyper growth story in two years. The stock price more than tripled between May and December 2016 and started moving sideways in the last three months. NVIDIA is now trading nearly 19% down from its all-time high of $120.92, but the price-sales (P/S) ratio still reads 7.7, a clear indication of how high the valuation has gone up for the chipmaker.


One of the reasons the stock jumped so high in such a short span was that NVIDIA's growth rate accelerated during the second half of 2016, and there were plenty of signs that led investors to believe that the newfound growth momentum would last for some time.

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Valuation and stock price steadily moved upward as revenue growth rate surged from under 20% before second-quarter 2016 to above 50% after. As is the case with any company with high valuations, even small news items can wreak havoc on the price - and NVIDIA was no different. The company lost nearly 9% to hit a three-month low in February as analysts downgraded the stock.

"We believe consensus is underappreciating a slowdown in gaming" and "investors should recognize that the market's enthusiasm for Nvidia's emerging businesses [in data centers and automotive] is historically short-lived," Nomura Instinet analyst Romit Shah wrote in a Wednesday note to investors, reported CNBC in February.

But Nomura was not the only one to downgrade NVIDIA: it was joined by BMO Capital Markets and Citron Research.

Not everyone follows analyst reports, and there have been more than a few occasions when they have been proven wrong. But the problem with NVIDIA is that its own valuation was so high that even analyst downgrades have now reached a stage where it can shake the stock in double-digit percentages.

NVIDIA has forecasted revenues of $1.9 billion for the first quarter, plus or minus 2%. If NVIDIA hits the midpoint of the forecast, it will be a growth of nearly 46% compared to the prior period. The company is still expecting the strong double-digit growth rate to continue, and once the first-quarter numbers are out the stock might even start surging north again.

It's a great company with great products, and it has time and again proved that it has the ability to be in the right business at the right time. It was not luck but rather an eagerness to keep expanding its portfolio of products while continuously out-innovating its competitors.

But the valuation has gotten to a stage where it's going to be a roller coaster ride with the stock swinging wildly as each and every news item hits. If you are an investor, be ready for the ride. If you invested in NVIDIA a few years ago, you got in at a great price and are sitting on a nice return. Don't press the panic button if you see a sharp downward slide, because that will be the new way of life for NVIDIA stock for at least a while longer.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

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This article first appeared on GuruFocus.