As we move closer to the penultimate month of the year, NVIDIA Corporation (NASDAQ:NVDA) sits perilously close to hitting $200, which probably has some owners of NVDA stock pondering a move to $300 or beyond.
First things first. Nvidia still has to top $200. Why my obsession with that threshold?
Back on May 24, I predicted that NVDA stock would hit $200 by the end of 2017. That claim also included it would do so before Advanced Micro Devices, Inc. (NASDAQ:AMD) hit $16.
Barring a poor-earnings backslide when earnings come out Nov. 8, NVDA stock it should hit $200 by New Year’s Eve. The other possible alternative is that AMD stock surges over the final 10 weeks of the year which isn’t out of the question.
I’m not saying this to toot my own horn; in the prognostication game, you’re doing well if you’re right more than 50% of the time. That suggests flipping a coin isn’t the worst idea in the world.
But I digress.
A New Obsession
InvestorPlace contributor Luke Lango recently discussed why NVDA stock should be trading over $200 given its secular growth potential. More specifically, Lango puts Nvidia’s fair value at $225.
His math is pretty straightforward.
RBC Capital Markets suggests NVDA earnings in four years will be $10 per share, an annual growth rate of 35%. At the end of those four years, Lango assumes that the growth rate will be about 25%, which implies a multiple of 30 times earnings of $10, for $300. Discount that by 10% annually and he comes to a current fair value of $225.
So, let’s assume NVDA’s fair value is $225. Truthfully, no one can ever know the actual intrinsic value of a stock, but that’s beside the point.
Analysts currently expect Nvidia to deliver earnings of $3.64, $4.03, and $5.38, respectively, in 2017, 2018, and 2019. That suggests that Nvidia’s earnings in 2020 and 2021 would have to grow by 36.5% each year to meet the $10 target set by RBC.
So, if the RBC analyst is correct, Nvidia will have 35% growth in 2021, not Longo’s 25% estimate. So, if Longo’s earnings multiple of 30 is 1.2 times the growth rate in 2021, it would be 42 times $10 based on a 35% growth rate — or $420.
Bottom Line on NVDA Stock
The NVDA stock price today is $198.68. To get to $350 in 12 months it has to increase by 76%; to do it in two years it has to deliver an annual return of about 34%; 22% to get there in three years and finally, to do it in four years, NVDA stock has to grow by 16% per year.
Since the beginning of 2013, NVDA stock hasn’t had an annual return of less than 27%. Using this 27% growth for future returns, NVDA stock would hit $350 in 30 months.
The only problem with this scenario is that earnings in 30 months time will be somewhere between $5-$7 per share. At the low end of this range, a multiple of 70 times earnings is almost twice the growth rate.
Something’s got to give.
What I think will give isn’t the earnings growth or the multiples being paid but the actual returns delivered by NVDA stock.
Based on those assumptions, I believe Nvidia stock will return 35% annually over the next two years hitting $350 by the end of calendar 2019.
Unless there’s a dramatic turnaround in AMD’s profitability, I see NVDA hitting $350 before AMD hits $25.
It’s that simple.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.