Nvidia is one of the worst-performing semiconductor stocks this year, though the shares are hardly in the bargain basement bin.

After a 42% drop, the maker of GPUs is much cheaper than in the heady days of 2021 when its market capitalisation was creeping toward US$1-trillion. Yet it’s still priced at 35 times projected earnings, rich both historically and compared to peers, especially at a time when revenue growth is expected to slow.

Nvidia’s plight is familiar to investors who have watched US stocks with nose-bleed valuations plummet this year under pressure from rising interest rates and concerns about weakening economic growth. Recently, however, the firm has joined the ranks of chip makers that have warned of slowing demand, putting the emphasis on forecasts when it reports second quarter results on Wednesday afternoon.

“Nvidia is doing a lot of exciting things and fundamentally we can’t turn our back on them, but obviously we’d love to get some indication of how long this lull is going to last,” said Daniel Morgan, senior portfolio manager at Synovus Trust. “That’s when you can take a look at the stock and say 35 times earnings is a great buy.”

The stock’s multiple compares with an average over the past decade of 29 times. It’s also in stark contrast to fellow chip makers like Micron Technology, Qualcomm and Microchip Technology that trade at around 12 times forward earnings. The Philadelphia Stock Exchange Semiconductor Index trades at nearly 16 times.

Drop in demand

Earlier this month, Nvidia gave preliminary second quarter results that showed revenue missing the company’s previous projection by more than $1-billion. Management blamed a drop in demand for its gaming chips, but also acknowledged a shortfall in its data centre business. Revenue growth is projected to slow to just 13% in the current fiscal year.

“We still see outstanding queries about forward demand,” said Wedbush analyst Matt Bryson, who has a neutral rating on the stock. “We are reluctant to get more constructive on the stock until we have more near-term visibility even if we remain positive on NVDA’s longer-term trajectory,” he wrote in a note.

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Retail traders seem less reticent. The week of Nvidia’s 8 August warning, the stock was the most popular among mom-and-pop investors, according to Vanda Research. Last week, Nvidia was the sixth-most purchased stock with the retail crowd pouring in more than $150-million. — Jeran Wittenstein, (c) 2022 Bloomberg LP