Nvidia (NASDAQ:NVDA) shares have rallied in the past week. The NVDA stock price gained 8.3% rose to $164.16 a share last week, fueled mostly by positive coverage from Wedbush’s Matthew Bryson. He gave the stock a $184 price target, believing Nvidia to have “strong growth prospects in numerous attractive end markets”.
And while the NVDA stock valuation has increased — it’s still cheaper than Advanced Micro Devices (NASDAQ: AMD) stock — high expectations continue to be priced into Nvidia shares. The company has positive investor sentiment on it side. But Nvidia’s stock price could stumble again on negative catalysts like a breakdown of U.S.-China trade talks or weak quarterly earnings report.
Progress Made In US-China Trade Talks
Over the weekend, President Trump and Chinese President Xi Jinping agreed to restart trade talks. While The U.S. will continue charging existing tariffs on Chinese imports as the trade talks resume, future tariffs are off the table.
However, we are not out of the woods just yet: Bloomberg reported that Chinese economic advisor Zhu Ning said that this “trade truce” does not make a final deal any more likely.
Chipmakers such as Nvidia have a lot to lose if the trade battle escalates. Nvidia’s stock price is vulnerable to any negative trade talk news. Even worse would be the tremendous downside in the event of a sales impact.
GPU Market is Stabilizing
Nvidia stock struggled throughout the first half of 2019 due to a glut in the GPU space. This glut was partly the result of GPU makers anticipating high demand from cryptocurrency mining. But when crypto prices plummeted in 2018, demand fell as well, leaving Nvidia holding the bag of excess inventory.
In the past few months, the GPU market has stabilized. While it would seem that the rebound in Bitcoin/other cryptos would be the cause, Wedbush’s Bryson gives all the credit to the gaming space:
“While we aren’t forecasting a rebound in cryptocurrency-related demand (though recent rising prices certainly create the potential for a bounce in mining builds), we do believe that inventories of gaming GPUs have largely normalized (in-line with the slight rebound in NVDA gaming sales last quarter).”
With gaming GPU inventories coming down, and demand stabilizing, Nvidia can continue to rely on its bread-and-butter (GPUs for gaming) to help fuel expansion in their growth markets (AI, cloud computing, autonomous cars).
On the other hand, Nvidia faces heavy competition from AMD for dominance in the gaming GPU market. With AMD launching the Navi line of GPUs, Nvidia is countering with their “Super RTX” line of graphics cards. According to TechRadar, the product line should hit shelves this month.
This new launch is a potential short-term catalyst, as long as sales meet expectations. However, with the recent rally, potential upside from this new launch could already be priced into shares.
Bright Future for Nvidia’s End Markets
The main catalyst for NVDA stock is the company’s focus on fast growing AI markets, including autonomous cars and machine learning. As these industries pick up size in the coming years, Nvidia will be sitting in the catbird’s seat.
Along with AMD, NVDA shares should see material upside once these industries reach critical mass. But does this long-term positive trend mean anything to investors entering NVDA stock today? While the company has bright prospects, the stock itself remains overvalued.
NVDA Stock Continues to Trade at a Premium
With high expectations for growth in future AI markets, NVDA and AMD shares continue to trade at premiums to broad line semiconductor companies such as Intel (NASDAQ:INTC).
While Nvidia continues to plug ahead in hot markets, with the current valuation — forward P/E of 23.1, compared to INTC trading at 10x forward earnings — the company must meet all investor expectations.
With an recession expected to be around the corner, NVDA stock is not a screaming buy at today’s valuation. There may be opportunity to enter a position if the Nvidia stock price falls to a moderate valuation. At a lower valuation, Nvidia shares would offer investors a stronger risk/return.
Bottom Line on Nvidia Stock
While its prospects are positive, Nvidia’s stock valuation if frothy, with a few challenges ahead.
The company faces an uncertain trade war, heavy competition from AMD, and has stumbled in terms of growth. Despite these headwinds, the market continues to value NVDA stock with the highest expectations.
While the company trades at a 23.1x forward P/E — lower than AMD’s 29.77x — this is no indication NVDA is a bargain. To be sure, buying Nvidia stock could be a good opportunity in the long-term. For investors looking for a short-term position, there may be better times to buy down the road.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.