Shares of GPU giant Nvidia (NASDAQ:NVDA) have been on a roller coaster ride over the past year. A year ago, Nivida stock was an untouchable AI stock closing in on $300.
At the end of 2018, though, Nivida plummeted to $130 on global semiconductor market meltdown concerns. Those concerns eased in early 2019. NVDA stock shot up to $190 by April. Then, by June, it had dropped to $130 again as semi market meltdown concerns came back to the forefront. They have since eased, and Nvidia stock has rebounded to $170.
Net net, over the past 12 months, the Nvidia stock price has traveled from $300, to $130, to $190, back to $130, and up to $170.
That’s a wild ride. But, I think this wild ride is set to end soon. Specifically, I think global semiconductor market fundamentals are showing signs of stabilizing and improving. As those fundamentals do stabilize and improve, NVDA stock should similarly stabilize into a more normal medium to long term uptrend.
That’s why I’m bullish on NVDA stock here. I’ve reiterated time and time again that late 2018 and early 2019 weakness in the stock was a byproduct of temporary market weakness. That market weakness is now passing. Taking its place will be longer-running secular tailwinds.
Ultimately, those secular tailwinds create a visible pathway for NVDA stock to climb back towards $300 in the long run.
Market Fundamentals Are Improving
The bull thesis on NVDA stock is that the company’s core fundamentals are finally starting to improve, after a multi-quarter stretch of temporary but ugly turbulence.
The semiconductor market has been hit hard over the past few quarters. There have been a few things at play here, including sky-high inventory levels, weak demand in the face of go-forward economic uncertainty, and rising geopolitical tensions. Nvidia has not been exempt from these headwinds. Over the past few quarters, the company’s revenues, margins, and profits have been in free fall.
But, the semiconductor market is showing early signs of bottoming out and turning around. From a macro perspective, global semiconductor sales improved month-over-month in May. While still down big year-over-year this was the first time that has happened in several months, including a month-over-month gain in the all-important Americas and China markets.
Further, the forecast calls for a 2019 year-over-year sales decline of 12% (less than the first quarter’s 13% drop), and a 2020 year-over-year sales gain of over 5%.
Broadly, then, global semiconductor sales trends are finally turning a corner, and are expected to improve into the back half of 2019 and 2020.
The microdata confirms this macro outlook. Texas Instruments (NASDAQ:TXN) recently reported Q2 revenue and profit beats as operations improved sequentially. Teradyne (NASDAQ:TER) also reported Q2 revenue and profit beats amid strong 5G and networking demand. Mellanox (NASDAQ:MLNX) topped Q2 revenue estimates as the company reported sustained strong cloud and AI demand. Intel (NASDAQ:INTC) reported strong Q2 numbers, too.
Net net, global semiconductor market fundamentals are stabilizing and improving, and this dynamic should power NVDA stock higher for the foreseeable future.
Nvidia Stock Has Runway Here
The valuation underlying NVDA stock, coupled with this company’s robust long term profit growth potential through numerous AI and data verticals, implies that at $170, the stock has a lot of long term upside potential.
Nvidia has broad exposure to all of tomorrow’s most important markets. The company is a big player in the hyperscale data-center space. They are also the leaders when it comes to supplying chips for machine learning, AI, self-driving, cloud gaming, augmented reality, and much, much more.
All of those markets have huge growth potential in the long run. The company also has very little price competition in those markets, implying that margins have room to move higher in the long haul. Consequently, Nvidia should continue to fire off double-digit revenue and profit growth rates over the next few years.
Nvidia stock trades at 32-times forward earnings. Sure, that’s a big multiple for a semiconductor stock (the average forward earnings multiple in this space is 16). But, the average long term projected earnings growth rate across the semiconductor space is 11%. For Nvidia, it’s 15%, according to YCharts.
Indeed, my modeling suggests that $13 in EPS is achievable for Nvidia by 2025, assuming double-digit revenue growth and steady margin expansion. Based on a growth-average 20 forward multiple, that yields a long term price target for NVDA stock $260.
Bottom Line on Nvidia Stock
Nvidia stock has undergone immense turbulence over the past year, mostly due to immense turbulence in the global semiconductor market. But, fundamentals in that market are starting to stabilize and improve. As they continue to do so over the next few months, NVDA stock should move higher with less volatility.
As of this writing, Luke Lango was long NVDA and INTC.
