A plethora of uncertainty plagues Nvidia (NASDAQ:NVDA) stock, which has declined and rebounded several times in the past year. Geopolitical risks and heavy competition continue to be material risks, while growth opportunities in artificial intelligence (AI) and automated cars counter these headwinds.
Does this mean Nvidia stock is a buy? Read on to see if NVDA’s current trading price presents a strong entry point.
Geopolitical Risks Remain
It is tough to determine the reality behind the media hype of a U.S.-China “trade war.” American tech companies are dependent on China for future growth. And Chinese tech companies need American-made microchips to power their tech sector.
As Forbes contributor Stephen McBride details in his June 11 article, China is highly dependent on American chipmakers such as NVDA. Without American chips, their technology infrastructure screeches to a halt.
But both sides have to balance between economic rationality and saving face. It is tough to predict geopolitical outcomes. This makes it a challenge to assess whether Nvidia’s geopolitical risks are priced into the stock.
AMD Continues to Challenge Nvidia’s Past GPU Dominance
Advanced Micro Devices (NASDAQ:AMD) is gaining dominance in the gaming space, much to Nvidia’s loss. Microsoft (NASDAQ:MSFT) is powering the next Xbox console with AMD chips. Sony (NYSE:SNE) plans to do the same with the next PlayStation console.
AMD continues to make strong inroads into Nvidia’s backyard. This makes me concerned the current valuation fails to reflect this risk.
But, Nvidia is being proactive in defending their turf. With the upcoming launch of their Super RTX graphics cards, Nvidia is fighting back against the success of AMD’s Navi line.
Time will tell whether AMD is a threat to Nvidia’s graphics franchise. But investors should keep this in mind when assessing NVDA’s future prospects.
Despite These Multiple Challenges, NVDA Is Still Priced for Perfection
Despite YOY sales declines, geopolitical risk and heavy competition, NVDA’s valuation implies continued high growth. With a forward price-earnings (P/E) ratio of 22, the company needs sales growth in the next quarter to justify its current earnings multiple.
While richly valued relative to the market-at-large, NVDA is a bargain compared to AMD (forward P/E of 29.67).
Still, NVDA trades at a premium to its larger competitors such as Intel (NYSE:INTC) (forward P/E of 10.78), NXP Semiconductors (NASDAQ:NXPI) (forward PE of 10.76), and Qualcomm (NASDAQ:QCOM) (forward P/E of 14.6).
Without strong future sales and earnings growth, Nvidia will start trading at multiples closer to these peers (implying a material decline in the share price).
Bottom Line: Should You Buy NVDA?
Despite many risks, NVDA continues to sell at a high earnings multiple. But with recent stumbles, is it rational to assume future growth in line with past performance?
NVDA is richly priced relative to broad-line semiconductor stocks, but still sells at a valuation discount to AMD. But that doesn’t make NVDA a “bargain” — investors could be overvaluing AMD.
NVDA’s growth markets (automated cars, virtual reality) are hot, sexy opportunities. But realizing this growth may not happen until the 2020s.
This means today may not be the best time to buy Nvidia. Shares could see sharp declines in the short term. This gives investors an opportunity to buy before these innovations go mainstream.
In the meantime, failure to grow earnings threatens the current valuation. If the market begins to value NVDA in line with INTC and NXP, shares may see a tremendous decline in value.
With all these factors in mind, at the current trading price, the risk-return is not in the investor’s favor. An additional pullback in NVDA may present itself as a buying opportunity. But for the time being, investors are better off staying on the sidelines with regards to Nvidia.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.