Has Nvidia Corporation (NVDA) Stock Finally Reached Sell Territory?

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Nvidia Corporation (NASDAQ:NVDA) was motoring along June 9, having gained almost 50% for the year at that point. Then, Citron Research dropped a six-page research note on investors that stopped NVDA stock in its tracks.

Has Nvidia Corporation (NVDA) Stock Finally Reached Sell Territory?

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Citron predicted that the chipmaker would fall back to $130; it also recommended Nvidia shareholders sell for profits and move their money to Alphabet Inc (NASDAQ:GOOGL). NVDA lost 11.2% by the time it closed the day’s trading. It has since recovered about 40% of those losses.

Not only has NVDA stock come a long way since delivering strong first-quarter results on May 9, but it has made strides in the past three years, increasing 640% since 2014, or eight times Google’s market cap growth. So it would seem that Citron’s argument has some validity.

Is Nvidia a casino? Is it time to sell? Let’s have a look at both sides of the argument.

Time to Sell?

When looking at any stock — especially momentum stocks like Nvidia — I like to consider my options. Thinking, then, along those lines, Alphabet is an attractive alternative if value has any meaning for you.

While Citigroup might have doubled its 12-month price target for NVDA stock from $90 to $180 in just seven months, that doesn’t necessarily mean it’s worth $180. Analysts, as Citron points out, do have a way of chasing stock prices, both up and down.

Citron mentions one metric that should give you a reason to consider selling: free cash flow. Alphabet grew its free cash flow over the past three years by 129% compared to 158% for Nvidia. That’s hardly enough of a difference to justify NVDA stock trading at 63.6 times FCF compared to 23.9 times FCF for Alphabet.

Flip that, and you get a 4.2% and 1.6% FCF yield for Alphabet and Nvidia, respectively.

Value investors look for 8% or more. While Alphabet isn’t cheap, NVDA is downright expensive.

Or Time to Hold?

If you look at Nvidia’s earnings results for the last four quarters, the company has surprised by 8.1% (Q2 2017), 45.6% (Q3 2017), 19.3% (Q4 2017) and 19.7% (Q1 2018).

Nvidia stock gained 5.6% the day after reporting Q2 2017 earnings, 29.8% reporting Q3 2017, -2.4% reporting Q4 2017, and 17.8% reporting Q1 2017.

 

Over the past four quarters, a 1% positive surprise in earnings led to a 0.5% increase in Nvidia’s share price. Unless you see a stinker of a quarter coming in August — analysts expect 69 cents per share vs. 40 cents a year earlier — you might want to hold through its second-quarter report.

Bottom Line on NVDA Stock

InvestorPlace.com’s Tom Taulli put it best recently when writing about Nvidia:

“You can’t walk a yard without tripping over reasons to be bullish about Nvidia Corporation… The company’s most recent earnings report received rave reviews, thanks to a 48% jump in revenues to $1.94 billion, and a 144% spike in net income to $507 million… Nvidia is running at peak performance.”

If you agree with his assessment, despite a forward P/E of 46, you’ve got to be buying regardless of the nosebleed valuation.

At the end of May, I suggested that if Nvidia keeps delivering strong growth, investors could expect NVDA stock to keep rising. Well, the company has been keeping its end of the bargain, so I’d expect its stock price to continue going up until it’s clear growth has slowed.

“I believe that short of a global economic catastrophe, Nvidia has an excellent chance of reaching $200 by the end of 2017,” On May 24, I wrote. “Furthermore, it’s a much better chance, in my opinion, than Advanced Micro Devices, Inc. (NASDAQ:AMD) hitting $16.”

So is it time to sell? I don’t think so. Enjoy the ride to $200.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/06/has-nvidia-corporation-nvda-stock-finally-reached-sell-territory/.

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