Nvidia investors should've sold the stock a month ago, strategist says

Don't blame Nvidia's booming AI chip business; blame the stock's lofty valuation.

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One Nvidia (NVDA) bear warned the time has come for investors to sell.

Nvidia failed to meet sky-high expectations when it reported its fiscal second quarter earnings on Wednesday. Nvidia reported profits and revenue that topped forecasts but not by as much as investors hoped, delivering its smallest earnings beat in the last six quarters.

Nvidia stock fell 6% on Wednesday evening in reaction to the results and continued to slide 4% lower on Thursday afternoon. Year to date, the stock remains up nearly 140%.

When asked when it might be time to sell, David Bahnsen, chief investment officer of Bahnsen Group, said, "About a month ago. Two months ago. Today. Tomorrow."

"People are paying for perfection," Bahnsen added (video above). "You're buying Nvidia banking on there being another investor who's a bigger sucker than you are."

The warning from Bahnsen comes as the stock has rallied 1,000% from its October 2022 lows. His call is based on one data point: Nvidia’s price-to-earnings ratio, which sits just above 56 after earnings but neared 80 in July.

He offered a reminder that a company and its stock are not the same thing.

"This is not me bashing on Nvidia," Bahnsen said. "This is a success story. I'm commenting on the valuation — that when you start paying those prices, the risk-reward skew becomes very unattractive."

Still, it’s a risk that the 89% of analysts with a Buy rating on the stock are willing to take. The stock has zero Sell ratings, which is understandable considering Nvidia posted $30 billion in revenue in the second quarter, a 122% increase over the same period last year.

Nvidia's future depends in part on other Big Tech companies. Hyperscalers Microsoft (MSFT), Meta (META), Alphabet (GOOG, GOOGL), and Amazon (AMZN) are responsible for 40% of Nvidia’s revenue, according to Bloomberg estimates.

Alphabet CEO Sundar Pichai indicated on the company’s earnings call this quarter that the company's spending on artificial intelligence would not slow down. “The one way I think about it is when you go through a curve like this, the risk of underinvesting is dramatically greater than the risk of overinvesting for us,” Pichai said.

TAIPEI, TAIWAN - 2023/05/29: Nvidia president and CEO Jensen Huang enters the stage while waving to the audience at a keynote presentation at COMPUTEX. The COMPUTEX 2023 runs from 30 May to 02 June 2023 and gathers over 1,000 exhibitors from 26 different countries with 3000 booths to display their latest products and to sign orders with foreign buyers. (Photo by Walid Berrazeg/SOPA Images/LightRocket via Getty Images)
Nvidia president and CEO Jensen Huang waves to the audience at a keynote presentation at COMPUTEX. (Walid Berrazeg/SOPA Images/LightRocket via Getty Images) (SOPA Images via Getty Images)

Alphabet's investment in AI, which represents a significant portion of Nvidia’s revenue, could be a bullish signal to come. But those business fundamentals aren’t the only focus.

"The estimates for next year and the year after that are starting to get way, way out of control," D.A. Davidson managing director Gil Luria told Yahoo Finance.

The next big question for investors is whether the Street’s reaction to Nvidia results this quarter will be enough to dampen earnings expectations heading into Q3.

For Bahnsen, it may already be too late.

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StockStory aims to help individual investors beat the market.

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