NVIDIA Corporation (NASDAQ:NVDA) stock is on fire. Shares of the graphics design chipmaker have moved from the mid $20s a piece in early 2016 to almost $200 today. With exposure to self-driving cars, artificial intelligence (AI), and other technological advances, NVDA stock is in high demand with technology investors.
However, while Nvidia is making all of the right moves, investors should be cautious buying more NVDA, at least for now.
Few can dispute that Nvidia is on the cutting edge of many technological advances. This places NVDA investors in the catbird seat. These investors have been rewarded with a stock value that’s 11 times higher than its price three years ago.
The company spent the first half of the decade seeing little stock growth as it sought to redefine itself, diversifying the company’s focus beyond gaming. Today, it makes the go-to technology for digital currency and data centers.
Investors Rewarded NVDA
NVDA holds up well against direct competitors Advanced Micro Devices, Inc. (NASDAQ:AMD), QUALCOMM, Inc. (NASDAQ:QCOM), and Intel Corporation (NASDAQ:INTC). As the NVDA stock price nears $200, investors need to decide whether they should buy a stock with a price-to-earnings (PE) ratio above 56.
By all accounts, 2017 has been a great year for NVDA stock. The stock has gained more than 85% year to date. For fiscal 2017, revenue increased 36% while diluted earnings per share (EPS) rose almost 140%.
The NVDA news feed confirms the bullishness. Barclays, Goldman Sachs, Mizuho Securities, and Needham have all hiked their price targets in recent weeks.
The next NVDA earnings report is scheduled for Nov. 9. The company topped earnings estimates on every other report this year, so a beat over the 94 cents a share average estimate is expected.
It’s also possible that NVDA could be destined to build a decades-long record of annual dividend increases. The company paid its first dividend of 8 cents per share in 2012. Since then, management has raised its dividend every year. It now stands at 56 cents per share, modest 0.28% yield. However, the dividend payout ratio is around 22%, making it very sustainable despite annual increases.
Return on assets (ROA), profitability relative to total assets increased by double digits. Return on equity (ROE), the profitability compared to stockholders’ equity, has also increased a lot. In most previous years, growth in these metrics remained between the high-single digits and middle teens. For 2017, ROA grew to over 19%, while ROE stands at over 32%.
NVDA Stock Rise is Cause for Caution
Still, as famed investor Jim Rogers said, “nearly every time I’ve strayed from the herd, I’ve made a lot of money.” The herd is definitely on the buy side. Therefore, NVDA stock looks to be one that should be purchased with one’s gambling fund. Given the 250 PE ratios of stocks such as Amazon.com, Inc. (NASDAQ:AMZN) or Netflix, Inc. (NASDAQ:NFLX), NVDA could easily match that PE.
However, it could also turn the other direction, so investors should approach NVDA stock cautiously. Buyers who got into Nvidia before this year have a lot to smile about. They’re seeing high levels of profit and are invested in the technologies that will drive the world’s future. However, with all this growth and a PE ratio above 50, the stock could be nearing the end of its growth cycle for now.
New investors face a risky path since the stock is at a price where it could go either direction. However, investors who stay with NVDA stock for the long term will likely enjoy hefty profits riding the next wave of technological advances.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.