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Education Series: Single-Stock ETPs

NVIDIA: Tech Overvaluation Hits Hard in 2022

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Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

Initially simply called “NV” for “Next Version” and then becoming a homophone for “envy” in Latin, NVIDIA Corporation is one of the world’s leading microprocessor companies. The company is also responsible for popularizing the phrase “Graphical Processing Unit” (GPU) in the course of describing some its leading products, which has gone on to elevate and enhance the experiences of many a gamer in the world.

The company’s stock (Nasdaq ticker: NVDA) is currently one of the most watched in the world right now since it lies squarely in the middle of the “tech” zeitgeist of high-conviction names for many investors. This conviction isn’t exactly unearned.

Fiscal Trends

A quick rundown of the past two years’ Full Year results versus the first quarter of this year – as per the company’s calendar – shows at least partially why the stock is so highly prized:

In past fiscal years, the trends indicate an all-round positive growth in excess of cost increases coupled with an almost-doubling of earnings per share attributable to common shareholders. In the current quarter, there is a slight indication that while costs and current liabilities are roughly proportional to one-fourth of the previous year’s figures, the revenue is a little less than a fourth. Diluted earnings per share, after accounting for a four-for-one stock split executed on July 19, 2021, also trails relative to the corresponding quarter in the previous year.

This isn’t necessarily a major concern this early in the fiscal year. However, like every other stock – particularly “tech” names – in the year so far, the stock price has seen a precipitous fall. The reasons for this is more reflective on the stock’s valuation as opposed to the company.

Ratio and Volume Analysis

From March of last year through this week, an analysis of the 3 ratios as carried in our recent articles, reveal a few interesting facets:

While the stock’s Price to Sales (PS) and Price to Book Value ratios indicate a fair bit of relative stability, the Price to Earnings (PE) ratio – by far the most popular metric for stability evaluation – shows a precipitous decline of nearly 37% in the current week. While high ratios are typically seen in companies with significant invested capital or in those with high growth outlook, lower ratios signify weakening growth outlook or a recognition of the company attaining some semblance of a “steady state” in terms of market share.

BlackRock Investment Institute’s Weekly Commentary dated June 13 attributed the larger organization’s decision to not “buy the dip” in the near term to three reasons:

  1. The energy crunch will hit growth and higher labour costs in the face of inflationary pressures will eat into companies’ profits;

  2. Stock valuations don’t show improvement after accounting for lower earnings outlook and faster expected pace of rate rises;

  3. There’s a growing risk that the Federal Reserve will tighten too much, making equities less attractive.

Leaving aside the third point, there’s an interplay between the first two points: if inflation weighs heavy on the earnings of individuals and corporations alike, what are the likelihoods of an upgrade in rig? Corporations could push back upgrades to improve their earnings while individuals would rather focus on essentials over spending on new tech.

There is also a very different argument as to whether the PE Ratios for long-standing companies should be in the 50s to 70s while simultaneously considering them to be stable in the first place. A dramatic growth outlook forever simply doesn’t happen.

Given that “tech” stocks have been a hot choice for investors for quite some years now, this leads to a consideration of traded volumes. Over the year till date (YTD), traded volumes have generally been trending down after the customary “January bump”. However, when comparing trading volumes in the stock versus the “tech-heavy” Nasdaq-100 (here represented by the ETF QQQ), this overall market trend isn’t very smooth.

Overall, there is a very high degree of correlation between rallies in the broader ETF and the stock. One possible attribution for the strong tendency to attempt a bullish rally on tech stocks (that nearly always come a cropper shortly thereafter) could be overall historical sky-high valuations in “tech”. If so, reality has been biting market participants hard; there appear to be simply no strong support for rosy Total Addressable Market estimates, operational efficiency estimates, et al in the face of increasing external pressure on earnings.

In Conclusion

While companies like NVIDIA are indeed valuable and can very well be considered as leading tech adoption, the overall conclusion seems to be that expecting the status quo from 2020 or even 2021 lies at odds with base reality: in the present day, overvaluation comes with volatile downward trends. In the months or quarters forward, a series of price discovery actions around certain levels could be expected. This gives an advantage more to the tactical investor with access to short-term trading instruments with daily-rebalanced inverse and leverage factors embedded who can capitalize on cycles of rises and falls. For long-term stock holders, the prospect of erstwhile stock valuations returning any time soon remains murky at the moment.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Sandeep Rao

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Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

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Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

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Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

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Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

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