NVIDIA's Q2 Earnings: High Expectations and Potential Risks

Nvidia: You Have Been Pumped And Warned By The Cloud Hyperscaler Honchos (NVDA)

Looking for a helping hand in the market? Members of The Quantamental Investor get exclusive ideas and guidance to navigate any climate. Learn More " Introduction After striking a blow-off top in mid-June, Nvidia Corporation (NASDAQ:NVDA) stock has experienced significant volatility - with NVDA tumbling by nearly 35% from ~$140 to ~$90 per share from mid-July to early August. However, with the unwind of the yen carry trade taking a pause and earnings excitement taking hold, Nvidia's stock has rebounded by +45% to ~$130 per share, heading into the semiconductor giant's Q2 FY2025 report on Wednesday, 28th August 2024. If you have been following my work on Nvidia, you know that I have been "Neutral" on this semiconductor giant for several quarters now - despite acknowledging Nvidia as one of the most obvious "picks and shovels" plays for the era of GenAI. Here's an excerpt that explains my stance: Since its breakout Q2 FY2024 results, NVDA stock has gone up in parabolic fashion, and I have missed this astronomical run [coming close to getting on board at ~$45]; however, at $100 per share, I see little to no margin of safety here because NVDA stock seems overvalued despite the use of generous assumptions for long-term margins and sales growth in our model. Now, in the case of Nvidia, I have been a broken record for a while, but I have to say this again - Nvidia Corporation is a great company with market-leading products and arguably the best CEO in the semiconductor industry. However, the price we're being asked to pay for Nvidia is too steep, in my opinion. In a zero-interest rate world, investors can afford to be valuation agnostic; however, we are no longer operating in such an environment, with the FED still pulling liquidity out of financial markets and a bank credit tightening cycle in effect after multiple bank failures. Despite running the risk of missing out on further gains in NVDA stock, I choose to remain on the sidelines here. FYI, I have been wrong about NVDA stock in the past, and I could be wrong again. While Nvidia is performing exceptionally right now, the current price tag leaves little to no margin of safety for a long-term investor. While GenAI demand still appears to be insatiable, the quantum of revenue beat is getting smaller, and Q2 top-line guidance was in line with buy-side expectations. Furthermore, Nvidia's management guiding for a margin contraction for the back half of FY2025 is ample reason for investors to take a pause. Nvidia is clearly winning big in the era of Gen AI; however, this initial-stage demand growth jump could yet be temporary in nature. Yes, Nvidia is trading at just ~35-40x forward P/E, but margins could be peaking here (at least for the short term). With all of its major customers building AI chips in-house (potential risk to revenues and margins), I see a genuine lack of a margin of safety here. In my view, Nvidia Corporation remains the most obvious "picks and shovels" play in the AI gold rush; however, a lot of future success is already baked into Nvidia's current stock price, and the long-term risk/reward doesn't justify allocation of fresh capital right now. Due to unfavorable risk/reward and sheer lack of a margin of safety, I am going to stick to the sidelines on Nvidia Corporation stock. Key Takeaway: I continue to rate Nvidia Corporation stock "Neutral/Hold" at $100 per share. Source: Nvidia Q1'25 Review: AI Party Rolls On, But I Refuse To Dance [NVDA share price adjusted for 10-for-1 stock split]. In today's note, we shall preview NVDA's upcoming report and re-evaluate the stock using TQI's Quantamental Analysis process to see if it's a buy/sell/hold at current levels. What Is The Earnings Forecast For NVDA? In its Q1 FY2025 CFO commentary, Nvidia's leadership guided for Q2 FY2025 revenues to be in the range of $27.44-$28.56B, implying +107% y/y and +7.5% q/q growth at the midpoint of the guidance range [i.e., $28B]. With triple-digit y/y sales growth, the AI party at Nvidia looks far from over heading into its Q2 report. However, the quantum of top-line beats has narrowed significantly in recent quarters, and the projected gross margin contraction in the back half of FY2025 raises concerns about the sustainability of Nvidia's rapid growth and ultra-high margins. With cloud hyperscalers building their own in-house AI chips and partnering with other players [like Advanced Micro (AMD)], I am not sure whether the worries around Nvidia's demand sustainability will ever go away. Earnings call commentary on AI CAPEX spending plans from the hyperscaler honchos - Microsoft's (MSFT) Satya Nadella, Alphabet's (GOOG, GOOG) Sundar Pichai, and Amazon's (AMZN) Andy Jassy - suggested robust near-term demand for Nvidia's AI GPUs despite a lack of clarity over ROI. For example, Alphabet spent $13B on AI CAPEX in Q2 and plans to spend $12B+ per quarter for the foreseeable future. However, when asked about ROI on this aggressive spending cycle, CEO Sundar Pichai discussed their ability to work through an infrastructure overbuild, if GenAI fails to deliver on its promise: Nadella and Jassy provided similarly vague answers on the ROI of their respective AI CAPEX, alluding to the useful life and alternative use of this AI hardware in cloud computing. They also referred to this CAPEX spend as a long-term asset due to a large portion going into land, buildings, and financial leases that will be amortized over 15+ years. By committing to increased spending on AI infrastructure for the near term, I believe the hyperscaler honchos have boosted some animal spirits, driving the parabolic run-up in Nvidia's stock. However, the vague answers over ROI on their AI spend and "hedging" by the cloud hyperscaler trifecta keep the risk of a growth cliff for Nvidia firmly on the table. Now, that said, for Q2, Nvidia is projected to beat management's guidance, with consensus street estimates for revenue sitting at $28.71B: Furthermore, ahead of Nvidia's Q2 FY2025 print, both revenue and earnings revision trends have been trending positive [i.e., analysts have been lifting their projections] with 13 "Revenue Up Revisions" and 19 "EPS Up Revisions": How Was Nvidia's Previous Earning Report? Last quarter, Nvidia eased past consensus estimates, with Q1 FY2025 revenue and normalized EPS coming in at $26.04B and $6.12, respectively. Here's an excerpt from my Q1 earnings review note for Nvidia: Once again, Gen-AI-induced demand for its AI GPUs drove remarkable +427% y/y growth within Nvidia's Data Center business, which remains the primary driver of the explosive business growth Nvidia is delivering right now: In Q1 FY2025, Nvidia's Data Center revenue jumped to $22.56B (+427% y/y, +23% q/q) [vs. est. of ~$22B] driven by higher shipments of Nvidia's Hopper GPU computing platform amid a gold rush for NVDA's AI GPUs. Interestingly, Networking revenue was down -5% q/q, and this is something to keep an eye on for future quarters. On the margin front, Nvidia's non-GAAP gross margin expanded to 78.9%, up 220 bps over Q4 FY2024 and up 1,210 bps over Q1 FY2025. With its vast first-mover advantage in AI, Nvidia's hardware + CUDA software ecosystem is commanding tremendous pricing power. Interestingly, the gross margin guide for Q2 calls for sequential contraction to 75.5%, with full-year gross margin guidance of mid-70% pointing to a low 70% gross margin in the back half of this year! With Blackwell GPUs, Nvidia plans to start generating SaaS revenues, but such a steep margin decline could be an indication of deteriorating pricing power. Yes, Nvidia's management could be sandbagging, but I guess time will tell if such a margin profile is sustainable in the long run. As of Q1 FY2025, the combination of explosive top-line growth and margin expansion is driving a massive AI windfall, with Nvidia's quarterly operational cash flow jumping to +$15.3B in Q1 (up from $2.9B a year ago) [free cash flow: $14.94B]. Despite Nvidia returning $7.8B to shareholders via buybacks ($7.7B) and dividends ($98M) during Q1, the semiconductor giant's fortress-like balance sheet keeps getting stronger, with cash and short-term investments position rising to $31.4B, up from $26B last quarter. Given the historical cyclicality associated with semis, I still think that raising capital at a $2.4T market capitalization is a far better idea for Nvidia than returning capital to shareholders via buybacks at ~20x forward P/S. Along with its Q1 report, Nvidia announced a 10-for-1 stock split and a 150% increase in its quarterly cash dividend. While a ten-cent dividend isn't a game changer, the stock split could drive more volatility in NVDA shares due to greater accessibility for retail investors. Source: Nvidia Q1 FY25 Review: AI Party Rolls On, But I Refuse To Dance. Given Nvidia's ongoing business momentum, positive Q2 read through from its biggest customers [i.e., cloud hyperscalers], and Huang & Co's solid track record of exceeding consensus street expectations, I believe Nvidia's Q2 report will be better than expected. However, will a double beat on Wednesday be enough to justify the lofty investor expectations built into NVDA's $3.1T+ market capitalization? Concluding Thoughts: Is NVDA Stock A Buy, Sell, or Hold Ahead Of Q2 FY2025 Earnings? Heading into a pivotal quarterly report, Wall Street analysts remain bullish on NVDA stock, with 32 out of 35 analysts covering NVDA [nearly 92%] rating the stock as a "Buy" right now. With the remaining 3 analysts rating NVDA a "Hold," there are no "Sell" ratings from Wall Street firms on NVDA right now. While the 12-month price target range for NVDA stock is expansive [$100-200], the consensus estimate of ~$150 points to an upside potential of ~18% from current levels! However, using generous assumptions for future growth and margins in our proprietary valuation model, we determined that NVDA stock is still overvalued at current levels. As of now, TQI's fair value estimate for Nvidia stock stands at ~$77 per share, roughly 40% below current levels. If you would like to understand our assumptions in more detail, please check my prior report. Assuming a base case P/FCF exit multiple of ~25x [ascribing a "quality" premium], we get to a 5-year price target of ~$165 per share, which implies a CAGR return of ~5.3%. With Nvidia's base case expected CAGR falling well short of my investment hurdle rate (of 15%) and slightly lower than long-term market (S&P-500) returns (of 8%-10% per year), I do not view NVDA as an attractive investment at current levels. Now, some of you might consider our 5-year CAGR sales growth assumption of 25% to be overly conservative, given the range of analyst estimates for FY2026 [$133B to $233B] calls for a continuation of AI-powered hypergrowth next year as Blackwell comes to market! However, through our linear approximation, we are projecting $380B+ annual revenue in FY2029, which is well above current consensus estimates. Hence, I think underwriting even higher growth would be imprudent. Technically, NVDA stock has regained short-term momentum ahead of earnings after re-claiming the 10-week and 20-week moving averages. However, the bounce in NVDA stock seems to be pausing at the key 78.6% Fibonacci retracement level. If we do see NVDA making a sustained push above $130, I think the ongoing bounce can extend to $140 and then to the $152-171 range. On the flip side, given the ongoing rollover in momentum indicators - Weekly RSI and MACD - selling pressure could re-appear in upcoming sessions. A strong rejection from the 78.6% Fibonacci retracement level could spark a deeper drawdown, which could send NVDA stock spiraling down to the $65-81 range marked on the chart below. Furthermore, despite scoring an "A+" grade for "Growth", "Profitability," and "Momentum," NVDA's quant factor grades remain unsupportive for fresh buying due to its "F" grade for "Valuation" and recent deterioration in "Revisions" grade from "A to A- to B" over the past six months. While Nvidia's business momentum is expected to stay strong in the near term, its stock appears to be overvalued, and its technical setup looks finely balanced. Considering NVDA's fundamental, quantitative, valuation, and technical data, I am sticking to my "Hold/Neutral" rating for Nvidia going into its Q2 FY2025 report. Key Takeaway: I continue to rate Nvidia Corporation stock "Hold/Neutral" at ~$127 per share. Thank you for reading, and happy investing! Please share any questions, thoughts, and/or concerns in the comments section below or DM me. We Are In An Asset Bubble, And TQI Can Help You Navigate It Profitably! Your investing journey is unique, and so are your investment goals and risk tolerance levels. This is precisely why we designed our investing group - "The Quantamental Investor" - to help you build a robust investing operation that can fulfill (and exceed) your long-term financial goals. At TQI, we are pursuing bold, active investing with proactive risk management to navigate this highly uncertain macroeconomic environment. Join our investing community and take control of your financial future today. JOIN THE QUANTAMENTAL INVESTOR "We're in an asset bubble, and I can help you navigate it profitably" I am Ahan Vashi, a seasoned investor with professional background in equity research, private equity, and software engineering. I currently serve as the Chief Financial Engineer at The Quantamental Investor, a community pursuing financial freedom through bold, active investing with proactive risk management. TQI was established in July 2022 with a singular mission to make investing simple, fun, and profitable for all investors. In alignment with this mission, we publish premium equity research reports on Seeking Alpha - research library - performance tracker. However, there's a lot more on offer within our investing group - features include highly-concentrated, risk-optimized model portfolios that meet investor needs across different stages of the investor lifecycle, access to proprietary software tools, and group chats. Learn more In addition to our work on SeekingAlpha, we publish best-in-class investing tidbits and research insights at TQI Tidbits [free newsletter], Twitter, and LinkedIn. Follow for more investing content. Analyst's Disclosure: I/we have a beneficial long position in the shares of AMZN, AMD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Nvidia's Q2: I See Limited Upside Post Earnings (NASDAQ:NVDA)

Looking for a helping hand in the market? Members of Beyond the Wall Investing get exclusive ideas and guidance to navigate any climate. Learn More " I want to make a disclaimer right at the outset: I've long been skeptical about how high Nvidia Corporation (NASDAQ:NVDA) stock could go. Unfortunately for my coverage history - and fortunately for buyers of Nvidia stock - my bearish rating aged like milk, including my most recent call (which was tactically correct initially, but the stock recovered too quickly from its 25% correction). Today, I'd like to preview the company's upcoming quarterly report, set to be published post-market on August 28, 2024, according to Seeking Alpha. Based on the information I currently have on hand, I don't believe that the company's bottom line or revenue will be significantly impacted by the GB200 production delays that many are discussing right before the earnings report. However, even if there's strong growth and skepticism about these delays dissipating, as well as considering the current low market positioning, I think the stock remains far from its fair value, even under the most optimistic input assumptions. After Nvidia reported its Q1 FY2025 results, Wall Street analysts have expressed varied expectations for Q2: While some remained optimistic about continued growth, 12 out of 31 have lowered their estimates, reflecting concerns about potential challenges that could hinder the company's progress. However, it's worth noting that even the most pessimistic analysts, or rather their opinions, couldn't impact the overall dynamics of EPS estimates. The consensus continued to rise for each quarter and each year: In fact, the market expects the company to achieve $28.71 billion in sales with a GP margin of 75.5%, and an operating profit margin of 65.9%, which is notably higher than the guidance provided by management. In other words, current expectations include a premium over management's guidance, which usually makes the probability of exceeding these expectations somewhat lower. On the other hand, in the last several quarters, Nvidia has beaten the EPS consensus figures by about 10-12% (quarterly), except for two earnings misses in Q2 and Q3 of fiscal 2023. So, today's 2-3% premium over the management forecast seems minimal to me, providing a significant chance of surpassing forecasts in Q2 FY2025. A considerable amount of skepticism around Q2 has emerged, largely not only due to the premium over management's guidance, but first, amid news that the production of the GB200 is being delayed. In case you haven't heard of it before, Nvidia's top-tier Blackwell product, the GB200 NVL 72, is set to be the most densely packed AI computing rack in the industry. However, its complexity presents real challenges like managing unprecedented power density, advanced liquid cooling, new TSMC chip packaging, and integrating ARM-based Grace CPUs instead of the usual x86 CPUs. So due to these complexities, Nvidia may face growing pains. Why do I believe it's an overreaction and there's no need to worry about these delays for the Q2 print? I think Nvidia is shifting its focus to other products that should help it offset any potential revenue loss. Specifically, as HSBC analysts noted in their recent note (proprietary source), Nvidia plans to emphasize the production of its Hopper H200 GPUs and advanced packaging CoWoS-S chips, which are expected to contribute significantly to sales in the latter half of 2024. Additionally, they view the delays as "slight," and that they aren't expected to cause a material downside to the FY25/FY26 earnings. BofA analysts also agreed (proprietary source) that Nvidia's earnings will likely face minimal impact from Blackwell GPU delays: they anticipate no impact for Q2 FY2025 at all, with sales "expected to align with or slightly exceed consensus at $28.6 billion, thanks to strong Hopper GPU performance." In Q3 FY2025, the impact is also expected to be limited, with BofA forecasting $30 billion in sales. That's slightly below the consensus, but again: They think the whole downside from the delays will be easily offset by stronger shipments of Hopper or other products. While Q4 FY2025 and Q1 FY2026 might see some effect from Blackwell delays, BofA expects any shortfalls to be recovered in the second half of FY2026, leading to solid growth for the year. The analysts also presented some potential workarounds to address the issues with GB200 delays I mentioned above: "Selling more flexible MGX boards, reducing the GPU count per rack, or lowering the amount of high-bandwidth memory to simplify packaging" would be a great solution. It's crucial to understand that the market is a forward-looking mechanism that tries to predict future outcomes. Therefore, much of Nvidia stock's post-earnings price action will depend on how management comments on the results and what forecasts they provide for future periods. NVDA's management typically provides guidance only for the next quarter. So since we can assume that the impact of the Blackwell delays will be limited to this period, I think it's likely that the guidance for Q3 FY2025 will not be revised downward. This could, in theory, send a very positive signal to the market participants, in my view. Strange as it may sound, positioning in tech stocks has fallen further recently, according to Goldman Sachs Prime Desk (proprietary source). I think this also creates a favorable environment for NVDA stock to rise even further if its triple beat streak - EPS beat, sales beat and raised guidance - continues. Info-Tech was net sold for the 4th straight week (13 of the last 16) and saw the largest net selling in 2 months as the sector was net sold in every region However, despite all these positive aspects for the company, I still believe that the stock is too expensive to buy at current price levels. Since about half a month has passed since my last analysis and much has changed in the world during this time, I propose updating my model based on new, more recent consensus forecasts, as well as my assumptions. The first change I want to note in my updated model is that the consensus assumes somewhat more modest revenues by the end of FY2029 than 3 months ago (the difference is ~$30 billion). I can't say what this is related to, as most of the earnings revisions recently have been positive. Perhaps the longer-term estimates have become a bit more realistic because they expect a faster slowdown in industry growth in a few years. In any case, this is a rather curious point that I can't overlook. Even though Nvidia operates in a cyclical industry with constantly changing market conditions, let's assume that the current cycle turns out to be very long and constant - this will enable the company to achieve consistently high EBIT margins. Previously, I assumed that the company's operating profit margin would gradually reach 65%. Now, I anticipate that by the end of next year, they will achieve a margin of 66.54%. However, I expect this margin to gradually decline to 64.54% by the end of the 2029 fiscal year. To maintain a leading position in the high-tech industry, constant expenditure on R&D and CAPEX is necessary - I therefore expect the CAPEX-to-sales ratio to level off at around 2% of sales. So this is what the intermediate data looks like for my discounted cash flow ("DCF") model: Today, Nvidia's relatively liquid bonds are trading at a yield of ~4.1% (last price). I assume this is what the company's cost of debt would look like today. Assuming an effective tax rate of 16.96%, a risk-free rate of 3.72%, and a market return premium (MRP) of just 5%, I get a WACC of 12.1%. This looks good given the Fed's still-restrictive policy, and it's 60 basis points lower than I got in early June. As I noted last time, it's really tough to figure out how fast Nvidia's free cash flow will grow in the future or what its EV/FCF ratio will be by the end of the forecast period (FY2029). I think the end market will eventually get saturated, which makes sense, and this will slow down the business growth rate - I think we may take Gordon's g rate of a maximum of 9% for our TV calculation. As for the EV/FCF, the current multiple of 80x seems far too high to me. Given that growth is bound to slow down by FY2028, as suggested by sales growth predictions, I believe the EV/FCF should be more like 45 times (at best), which is closer to the average over the past decade. So, all these assumptions lead me to the following conclusions: In other words, if we round up, Nvidia stock turns out to be 12-29% overvalued, even if we assume that Wall Street analysts are wrong again and their forecasts once again underestimate the company's true growth potential (by the same amount as recently). But compared to what we saw 3 months ago, the overvaluation today got even more stretched, not allowing me to rate NVDA as a "Buy." My conclusions today are quite mixed. On one hand, I believe that the short-term challenges highlighted by some bears recently are exaggerated - the delays of the GB200 are unlikely to significantly impact Nvidia's expected earnings this fiscal year. While current price forecasts suggest another beat, the premium size (2-3%) is below the average quarterly positive surprise (about 10%), so I think NVDA still has a strong chance to exceed both EPS and sales expectations for Q2. Regarding potential guidance and commentary, I also do not believe management will lower Q3 FY2025 guidance. So given the low positioning of investors in Info Tech (compared to the MSCI World Index), everything points to a positive reaction of Nvidia stock to the upcoming earnings. However, I'm concerned about Nvidia Corporation's valuation, which has increased even further recently. Even assuming a positive scenario for future business growth, I believe Nvidia is overvalued by 12-29%, depending on the method used to calculate its terminal value. While it's true that many investors don't use discounted cash flow models for fast-growing companies like Nvidia, due to the challenges of forecasting far into the future, the company does generate strong FCF. Thus, I believe DCF analysis shouldn't be ignored here, as it may be one of the best ways to value a business. Based on this mix of insights and findings, I think a neutral rating best characterizes the company. Therefore, I've decided to raise my rating to "Hold," despite being skeptical about any upside from the current price (I believe the stock has limited potential for further gains). Any massive spike from here would result in a "Sell" rating.

Why I'm Selling Nvidia Ahead Of Q2 Earnings (NASDAQ:NVDA)

Nvidia's commitment to buybacks over R&D and equipment shows me a focus on stock price over new initiatives. Market heavyweight Nvidia Corporation (NASDAQ:NVDA) releases its second-quarter 2025 earnings post-market on Wednesday. In this article, I will discuss why I am selling the stock ahead of that update. Investors must accept that growth is slowing The first basis of my bearish call is that the company's blockbuster growth is slowing down. The company's revenue has slowed from quarterly growth of 88% in July 2023 to 18% in the most recent quarter. In the company's Q1 2025 earnings release, management projected a Q2 return of $28 billion. That would mark another slowdown to 8% quarterly growth. To put that into perspective, rival chipmaker Advanced Micro Devices (AMD) currently has quarterly sales growth of 8.8% and a valuation of around 10x price/sales. Meanwhile, Nvidia currently has a price/sales metric of 25x. I understand there is an element of apples vs. oranges with these companies, but valuation is why we are here. Gross profit and net income are high at the company, but the gap to revenues is closing fast and are now more closely aligned. Blackwell delays will affect growth prospects Many analysts are trying to play down the delays to the company's new Blackwell chips. A report from The Information said that the new products were "delayed by three months or more due to design flaws." That extended a bout of bearishness in Nvidia stock to lows near $90, but a rebound of around 40% since then has boosted investor hopes. I would see it as a golden opportunity to cut stake sizes in the company, or exit. The Information added: It is highly unusual to uncover significant design flaws right before mass production. Chip designers typically work with chip makers like TSMC to conduct multiple production test runs and simulations to ensure the viability of the product and a smooth manufacturing process before taking large orders from customers. It's also uncommon for TSMC, the world's largest chipmaker, to halt its production lines and go back to the drawing board with a high-profile product that's so close to mass production, according to two TSMC employees. In my opinion, it is possible that Nvidia, pressured by the stock price surge, is rushing to develop new products to please Wall Street analysts. Regardless, the report cited two suppliers close to Nvidia, saying that the new GB200s will initially ship in Q4, and are expected to see an increase in production volume in Q1. That was actually the original release timeline, so it is interesting that the new chips are said to be on track with the late design flaw. After this recent development, management will update investors in the upcoming Q2 earnings release, and it is an unknown that could hurt the growth trajectory of the stock. That puts a further dent in the current valuation of the stock. It is also a potential future headwind for the stock if an aggressive timeline for chip development leads to a product recall. UBS analysts said recently that Blackwell shipments would be delayed by "four to six weeks at most (putting them at the very end of January 2025)." That led to a rebound in the company's stock, and analysts at the investment bank said that increased appetite for H200 chips could fill the gap until then. The other issue here is that customers switching their allegiance to the new chips will do so at their current rate of demand. Elliott rings the bell on the AI bubble Around the time that the Blackwell delay was announced, hedge fund Elliott Investment Management delivered a bearish assessment of the chipmaker. The FT cited a client letter from the $70 billion fund that said Nvidia is a "bubble," and the technology driving the share price is "overhyped." That letter came out when the company was 40% lower than the current price. Elliott analysts are "skeptical" that Big Tech will keep buying the company's GPUs at the same volume. Many of the planned uses for generative AI are "never going to be cost-efficient, are never going to actually work right, will take up too much energy, or will prove to be untrustworthy," they added. Big Tech has gone on a spending frenzy to soak up Nvidia's chips, but there is yet to be a commercially successful product in place. "There are few real uses," it said, other than "summarizing notes of meetings, generating reports, and helping with computer coding," Elliott said. Many companies were on a win-win with chip purchases. Any mention of AI led to a surge in a company's stock price over the last two years, and a ramp-up in AI spending led to a surge in the company's stock price. In my opinion, chip spending is reminiscent of Meta Platforms' pivot and splurge on the metaverse. Mark Zuckerberg's vision for the virtual universe has cost the company more than $50 billion, and now he is touting AI as the future. I believe Nvidia's sales will plateau further when Big Tech's AI projects meet their requirements for development and employee capability. Other financial considerations Another issue I have with Nvidia's growth valuation is that the company is not spending anything on research & development. R&D costs over the period I studied rose from $1.87 billion in April 2023 to $2.72 billion in the most recent quarter. Cash from operations has risen over the same period from $2.9 billion to $15.3 billion, but Nvidia has chosen to spend on share buybacks. Repurchases in the previous two quarters were around $6 billion and highlights that the company's share price is more important than any new initiatives, in my opinion. The company has a minimal dividend yield of 0.02%, which is smaller than the sector median of 1.44%. It is possible that management could announce special dividends, or ramp up its quarterly yield. However, that would be a further sign that returning cash to shareholders is the company's focus and that management is pinning its hopes on continued Big Tech chip spending. The company's Q1 CFO commentary said they had "Purchase commitments and obligations for inventory and manufacturing capacity were $18.8 billion." That is equivalent to only one quarter of revenue. Nvidia has only added $500 million to its plant, property, and equipment over the last four quarters. That seems odd for a company that is struggling to meet demand and sees long-term growth for its products. Downside risks to my bearish call I believe the initial risk to my investment call is the coming earnings release. Elliott Management said weak earnings could "break the spell" on Nvidia, but the company's strong net income has the potential to create another earnings per share beat. The company has surprised the market with EPS expectations over the last four quarters, and although that metric is also slowing, an improvement on analysts' expectations would be a positive headline. Analysts have also guided for revenue to come in just ahead of management's $28 billion projection. Any beat on that figure would also boost investor hopes while ignoring the growth trajectory. There are also options for an increased dividend and buybacks. Conclusion Nvidia is still an impressive company with growth potential in areas such as autonomous driving. However, I believe that the company is overvalued at current prices and investors run the risk of holding the bag for an earnings shock. Revenue is slowing at the firm, and the previous gap in net income is closing. There is still the potential for an earnings per share beat in the coming quarter, but those surprises are also reducing in size. With the company's demand (one-quarter of commitments) outpacing supply, there is limited opportunity to ramp up production. The Blackwell delay is another headwind to growth and means that any large upside could be limited into the second quarter of 2025 (FY 2026). Investors are also playing with fire, as Big Tech's pet project has yet to produce a significant breakthrough for a mass-market product. That could mean a slowdown in spending over the coming year as they hit a plateau in their AI building capabilities. Author of "The Stock Market is Easy - How to Avoid the Pitfalls of the Average Investor".I am an active trader in stocks, FX, crypto, and commodities with over 15 years of market experience. I hold a master's degree in finance and mix microeconomic studies of company financials with a big-picture macroeconomic view. Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Short position through short-selling of the stock, or purchase of put options or similar derivatives in NVDA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I will be taking bearish options positions ahead of the Q2 results. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.