Nvidia investors are 'paying for perfection': David Bahnsen

Wall Street has Nvidia (NVDA) under the microscope today as the chipmaker prepares to release its long-awaited second quarter results after the bell on Wednesday. As a key driver of the AI trade and broader market gains, investors have flocked to the stock to capitalize on the artificial intelligence boom.

However, The Bahnsen Group CIO David Bahnsen is not as optimisitic, warning investors to sell the stock while they can.

Bahnsen joins Morning Brief to discuss his bearish outlook on Nvidia ahead of its earnings results. He argues that the expected earnings growth was projected over a year ago and is "priced into the very high multiple at that time." While acknowledging that Nvidia has "performed remarkably well," Bahnsen questions whether new investors are "paying for a company that already has that [valuation] known?"

"70x earnings with a 100% earnings growth priced in. There's absolutely no margin for error," Bahnsen tells Yahoo Finance, stating that the company cannot maintain this kind of growth trajectory indefinitely.

He draws a parallel between Nvidia's growth and Cisco Systems's (CSCO) in 1999, noting that despite Cisco's consistent outperformance, "the problem is 25 years later, the stock is still nowhere near where it was in that bubble valuation."

Bahnsen ends with a warning: "You're buying Nvidia banking on there being another investor who's a bigger sucker than you are. It's called greater fool theory."

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Angel Smith

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Video Transcript

Wall Street has lofty expectations here for the chip maker, expecting earnings growth of over 100% year over year revenue growth of about 99% year over year.

The Mag seven heavyweight set to announce its latest results with 66 by ratings on the Street and with its shares up over 160 percent this year.

But into our next guest saying, Hold My beer isn't sold on all the hype.

David Bonson is the chief investment officer over at the Bonson Group here to tell us why now might be the time to explore other investment options.

All right, why?

Why the cold water here?

Well, the notion of the earnings growing 100% year over year was projected a year ago, nine months ago, six months ago and three months ago.

That's all been known and priced into the very high multiple.

At that time, there's absolutely no question that the company has performed remarkably well and that the, uh, outstanding financial metrics of revenue growth and earnings growth have been noteworthy.

The question is entirely for people buying the stock.

Whether or not that's priced in, are they paying for a company that already has that known.

And it's very obviously known because 66 analysts have said so and we're sitting here talking about it now.

70 times earnings, with 100% earnings growth priced in, uh, there's absolutely no margin for error.

And on a go forward basis, there's no doubt that there will end up being some snafus, some revenue hiccup, some margin compression that will throw a lot of water on this party.

Where do you think that's gonna be derivative of?

Because, I mean otherwise, as of right now, we we could have said these are gonna be tough comps to continue to try and deliver to the street three quarters ago.

Well, three quarters ago, there wouldn't have been much of a reason to think that was imminent.

The issue is entirely about the appetite from the investing public to pay up for it.

That part I couldn't time and couldn't dare to guess.

Um, I think the analogy here to 1999 Cisco is almost perfect because Cisco never did run into a snap.

There never was a point at which revenue, uh, tanked, earnings tanked.

They performed remarkably well.

Problem is, 25 years later, the stock is still nowhere near where it was in that bubble valuation.

NVIDIA faces the same thing.

They're going to perform very well.

It's just you're paying 70 times earnings for it.

So when is the right time for investors to sell the stock?

Um, about a month ago, two months ago today.

Tomorrow, they don't have to sell all of it.

I don't re I.

My position is just simply for us as more value oriented investors and dividend growth investors to just simply point out that people are paying for perfection.

And what the investment thesis is at this point has nothing to do with NVIDIA.

It has to do with other investors.

You're buying NVIDIA banking on there, being another investor who's a bigger sucker than you are.

It's called greater fool theory that can go on for a long time.

People can make a lot of money doing that.

Um, I just am not any good at it, and I don't think very many people are either.

But that's really what the investment thesis in NVIDIA is right now is praying that someone else will pay up more than you do