Nvidia Corporation (NASDAQ:NVDA) stock has been strong this year, getting off to a quick 21% gain so far in 2018 despite recent selling pressure. Will the good times last, or will NVDA stock come back down to earth?
Thanks to Facebook, Inc. (NASDAQ:FB), many industries within the tech sector have come under pressure. Nvidia stock is actually holding up pretty well, despite the volatility in the broader market. Given its latest quarterly results, the strength really isn’t surprising.
Gaming — which has been a big tailwind for stocks like Sony Corp (ADR) (NYSE:SNE), Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY), Activision Blizzard, Inc. (NASDAQ:ATVI), Electronic Arts Inc. (NASDAQ:EA) and others — has been driving NVDA stock higher, too.
GPU sales have been impressive, and management expects this tailwind to continue. Another demand for GPU sales is crypto miners. They need powerful setups to mine cryptocurrencies, and that too is helping drive sales for Advanced Micro Devices, Inc. (NASDAQ:AMD) and NVDA.
The Future With Nvidia
It’s not just video games and cryptocurrencies driving Nvidia, though. The company continues to land partnerships with big tech companies in the cloud and those working on artificial intelligence and machine-learning technologies. Nvidia also continues to lead the charge in self-driving cars.
It can be easy to dismiss these “fantasy-like” technologies, like self-driving cars. But the truth is they are coming, and there’s one main company that’s behind it all: Nvidia.
At some point, NVDA stock won’t rally like it has over the last few years, and at some point, it will suffer some big losses. After all, it’s certainly not cheap. But Nvidia will be the company behind a number of tomorrow’s game-changing technologies, and if you can buy this stock on a pullback, it would be wise to have some exposure.
Valuing Nvidia Stock
Nvidia hasn’t missed an earnings or revenue estimate in over two years. In fact, management continually blows away analysts’ estimates each quarter. That doesn’t lower the valuation technically, but it’s something to remember when we’re trying to value Nvidia. In a nutshell, any forward-looking valuations are likely based on estimates that are too low.
So while NVDA stock may trade at 15 times last year’s revenue, it trades at 12 times 2018 estimates and likely even lower given that estimates for $12.37 billion in total sales is likely too low.
Analysts expect 35% earnings growth in 2018, which outpaces expectations for 27% sales growth, signaling widening margins. Current estimates call for earnings per share of $6.28. Conservatively, let’s assume Nvidia earns $6.50 per share. Even that figure is likely too low, considering last quarter’s $1.72 per share in earnings came in more than 50 cents per share ahead of expectations.
In any regard, if we use the $6.50 estimate — Street-high estimate calls for earnings of $7.14 per share — NVDA stock trades at 38 times 2018 estimates. While it’s not cheap, it’s not an atrociously high valuation — especially given how much money NVDA voluntarily pours into R&D to make sure it remains a stalwart tech supplier for years to come.
Trading NVDA Stock
So what do we make of Nvidia stock today? Nvidia’s chart is pretty simple to decipher: it’s bullish. Shares languished through last spring, finally breaking out in May. We would only be so lucky to have another quarter of consolidation this year.
Alas, Nvidia stock has spent most of the year rallying and more recently, butting its head up against $250 per share. This level of resistance has been in place since January. Absent a large market selloff such as the one in early February, it looks likely NVDA stock will ultimately push through this level.
There are several $300 price targets on Nvidia stock, but the highest sits at $305, from SunTrust Robinson Humphrey. That represents approximately 30% upside from current levels. So long as Nvidia maintains momentum in its business, it’s likely that the stock will make its way there.
Investors who have no position but want to get long have a few alternatives. First, they can buy on a breakout over ~$250 or on a pullback into support. Thanks to the latest decline, the latter seems like a probable outcome.
Trend-line support (black line) has been in place for about a year now and is just a few dollars per share below current levels. Buying on tests of the 50-day and 100-day moving averages has treated investors well, too.
If you want to own a piece of NVDA stock, strike while the iron is hot.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a long position in NVDA.