Nvidia (NASDAQ:NVDA) saw a nice bounce on Friday, thanks to an analyst upgrade. Evercore ISI (NYSE:EVR) analyst C.J. Muse moved its target for the NVDA stock price to $400 — the highest on Wall Street. Nvidia stock gained 5% on the upgrade.
From one standpoint, Muse seems overly aggressive. The NVDA stock price already has risen by a factor of 11 in just the last three years. Nvidia stock already trades at 35 times fiscal 2020 earnings. Suggesting another 40% gain for such a widely-covered stock seems, at best, overly optimistic.
But there is a case for Nvidia to continue to climb — and to hit the target Muse cites. I wouldn’t necessarily guarantee that kind of upside — it was only seven months ago that I was calling for the stock to hit $250 — but the path exists. And that path shows why Nvidia stock remains a buy, even after the huge gains of the past few years.
Can the NVDA Stock Price Really Hit $400?
There are two components to Evercore’s upgrade. From a short-term standpoint, the firm simply sees near-term earnings estimates as too conservative. Muse wrote that Nvidia could increase earnings 30-35% in each of the next two years. Yet Street consensus at the moment suggests a rather soft ~9% increase in EPS in fiscal 2020.
History alone suggests Muse probably has a point. Analysts have been underestimating Nvidia earnings for years now. The company hasn’t missed Street expectations on the bottom line in three full years. The Street, no doubt, is expecting a significant fall-off in cryptocurrency-related revenue — which has been a source of anxiety for Nvidia investors — but a deceleration to single digits does seem unlikely.
And if NVDA can keep recent earnings growth intact, it likely will maintain its earnings multiple — if not see it expand. Muse seems to be projecting something close to $10 in FY20 EPS; a 35-40 forward price-to-earnings multiple would move the stock toward the $330-$380 range.
The second aspect is the long-term potential of Nvidia. And Muse — wisely, in my opinion — points to Nvidia “becoming the standard AI platform.”
As Tom Taulli pointed out earlier this month, Muse isn’t alone in that argument. Needham hiked its price target to $350 using a similar case, with its analyst Rajvindra Gill comparing Nvidia to Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT) ahead of the PC revolution. Evercore cites a potential addressable market of over $100 billion — in which Nvidia very well could be the leader.
What Goes Wrong for Nvidia Stock?
The rewards here are clear. The question comes down to the risk. And there are significant risks here.
First, with the exception of NVDA and Advanced Micro Devices (NASDAQ:AMD), there’s some clear nervousness around the chip sector at the moment. Intel and Micron Technology (NASDAQ:MU) have seen their stocks pull back; equipment manufacturers Applied Materials (NASDAQ:AMAT) and Lam Research (NASDAQ:LRCX) trade near 52-week lows. The NVDA stock price, so far, has avoided much in the way of pressure — but further concerns about the chip space could change that.
More broadly, the question is whether the semiconductor business — or at least Nvidia’s semiconductor business — truly is different. This, historically, has been a cyclical space, where earnings rise when demand spikes and fall when supply meets that demand. Nvidia’s edge in areas like gaming and AI has left it immune to the cyclicality. But with a rising AMD, in particular, the question is whether that can last.
And the third risk simply is valuation. Evercore’s target seems to suggest a 40+ forward P/E multiple. Few semiconductor stocks sustain that kind of valuation forever. Strength in gaming, AI, and data center can keep that valuation up. But I do worry that investors still are too bullish on the automotive opportunity, which now contributes a small amount of revenue (less than 5% of year-to-date sales) and probably is further out that autonomous driving bulls might suggest.
Still Bullish, But Not Sure on $400
To be honest, I’m not completely sold on the $400 target — at least not within twelve months. But I do think that NVDA remains one of the best growth stocks in the market. Gaming demand isn’t slowing, and the company is becoming a force in data center. Valuation is high, but for a company likely to be dominant in multiple growing categories, it should be high.
And that’s enough for now. It’s easy to forget in the context of NVDA’s recent performance, or that of tech overall over the past few years, but 15% or higher returns in a year actually is pretty good. Falling short of the $400 target over the next year isn’t a failure for Nvidia. If all breaks well, NVDA could touch that $400 target. If not, I still think the stock will outperform the market — and provide solid upside from current levels.
As of this writing, Vince Martin has no positions in any securities mentioned.