As Nvidia Corporation (NASDAQ:NVDA) stock continues to storm higher, many investors have been expecting a massive pullback as a result of its surge. So, that makes me wonder: Is the recent decline just getting started or is this dip a buying opportunity in NVDA stock?
Nvidia is an investment, not a trade, because even though it carries a high valuation, it’s in so many important secular growth themes — be they gaming, the cloud, artificial intelligence or self-driving cars.
Despite how much better of a company Advanced Micro Devices, Inc. (NASDAQ:AMD) has become over the last few years, NVDA remains head and shoulders above it. NVDA doesn’t have to sacrifice market share or profit margin to compete with AMD either. As the total addressable market grows, there is room for two players; hence, AMD’s resurgence. But it hasn’t come at the expense of Nvidia.
It’s simple, really: Investors are constantly looking for way to invest in the future. In the cloud, they went to Salesforce.com, inc. (NASDAQ:CRM) and, later, Amazon.com, Inc. (NASDAQ:AMZN). For self-driving cars, investors are looking to General Motors Company (NYSE:GM) and Tesla Inc. (NASDAQ:TSLA).
But why not look at the company that serves as the backbone to these technologies? Nvidia is the one that can turn these visions into reality. Cloud storage is going nowhere but up. And while CypressOne Inc (NASDAQ:CONE) is a reasonable-idea REIT, again, why not invest in the backbone? Gaming, artificial intelligence (a biggie!) and other industries all fit this strategy.
Some have noted that Nvidia is becoming the Intel Corporation (NYSE:INTC) of the 1990s. If that’s true — and why wouldn’t it be? — NVDA stock could have much greater upside from current levels. Intel helped lead the PC generation for tech decades. Nvidia can do the same for a number of different technologies.
NVDA stock trades with a price-to-earnings (P/E) ratio of 55 and with a forward P/E ratio of 40. It’s price-to-sales (P/S) ratio of 12.95 is no drop in the bucket either, particularly when compared to INTC and AMD, which trade at 3.33 and 1.95 times sales, respectively.
But here’s the thing about NVDA stock: it’s constantly underestimated, particularly by Wall Street analysts. I pointed this out back in April, when analysts were expecting Nvidia to earn $3.40 for the current year (fiscal 2018). Analysts now expect the company to earn $4.20 per share, up almost 25% from earlier in the year.
Despite predicting earnings to grow more than 63% year-over-year in 2018, many analysts believe that growth will cool to just 12.4% in fiscal 2019 (next year). I think there’s a good chance that FY 2019 numbers need to come up, too. Management has beat earnings and revenue expectations for nine straight quarters — a streak that should continue.
One last note: While NVDA is vastly more expensive than its peers on a sales basis, its margins are far higher too. Consider that Nvidia carries a trailing-twelve-month-profit margin of almost 29%, while INTC has just 22.4% profit margin and AMD is negative. On a gross margin basis, NVDA and INTC are close, at 61.9% and 59.3%, respectively. Again, AMD is a distant third at 33.5%.
Although INTC and NVDA are close in gross margin, consider the growth. Analysts predict sub-5% sales growth for INTC this year and next, and almost flat earnings growth after a 20% boost this year. It’s not even close to Nvidia, not to mention the latter’s inroads to secular growth themes.
After the company’s latest earnings report, analysts were quick to toss around the $250 price tag. When Evercore ISI’s C.J. Muse first did it back in mid-September, some were wondering if euphoria was taking over. Now he’s just one of six analysts to have a price target of $250 or more (the high is $270).
So, where does that leave us?
With a 52-week high of $218-and-change, $250 didn’t seem too crazy before NVDA stock price fell down to $190. Now almost $30 per share or 13.5% off its highs, NVDA offers a compelling entry point.
However big-time support sits near $170. If we can get a pullback to that level, I would strongly suggest adding to a long position. That would be nearly $50 per share off the highs and down 22%. Bear market territory or not, that would be a great time to load up on this secular winner for the long-term.