Breakingviews: Nvidia has limits to supercharged growth

Even Nvidia has limits to its supercharged growth. The $326 billion semiconductor firm is riding a wave of demand for its gaming and data center chips, and the pandemic has provided a bit of extra swell for both. But its suppliers are struggling to keep up, which not only limits its current potential. It puts future sales – and valuation – at risk, too.

The company specializes in creating chips that do many simple tasks simultaneously. These have highly sophisticated uses, like making computer graphics more lifelike or helping data centers go through torrents of information. The result is steadily increasing demand for Nvidia’s products, which has reached a fever pitch during the pandemic. Revenue from its gaming division rose 37% compared with last year, while sales in its data center division grew 162% compared to the same quarter last year.

The trouble is Nvidia could have done better, if it weren’t for a few snags out of its control. Its suppliers can’t produce Nvidia-designed gaming chips fast enough. So there was even more demand than it could meet. That should gradually improve, but for now Nvidia is leaving money on the table.

This supply-demand mismatch happens often enough in the chips sector, too. And so its earnings this quarter were partly flattered by a large order from a Chinese company, who may have also been getting head of a supply crunch. Nvidia doesn’t think this order will reoccur, so it estimates data center sales will actually fall slightly in the coming quarter.

Nvidia’s stock now trades 16 times higher than it did just five years ago, and at nearly 50 times estimated earnings over the next 12 months according to Refinitiv – nearly triple the multiple of peers. The company’s future is undoubtedly bright, and founder Jensen Huang is one of the best at discerning semiconductor trends, but the company’s valuation leaves little room for disappointment.

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