Since Nvidia (NASDAQ:NVDA) reported Q2 2020 earnings on Aug. 15, Nvidia stock is up 30%. If the stock is going to head higher through the final two months of 2019 and into 2020, here’s what I believe investors ought to be looking for when it reports its third-quarter results Nov. 14.
There’s no question that AI has investors very excited about Nvidia stock moving higher.
And Nvidia is definitely feeling the love from analysts in recent days. On Oct. 15, NVDA stock gained more than 5% on the back of two price-target hikes by Wall Street analysts.
“Nvidia’s data-center growth is on the cusp of benefiting from the next-big AI (artificial intelligence) landmark — the ability to accurately listen, understand, speak and contextualize human speech, referred to as natural language processing (NLP)/conversational AI,” Bank of America analyst Vivek Arya said in a note to clients.
A core reason why Arya upgraded NVDA stock’s target price from $225 to $250 was data center growth, which he expects to grow 17% “annually through 2024.” The new target suggests that NVDA stock would provide investors with a 12-month upside of 28%. And this is on top of its year-to-date total return of 43%.
Not bad for a semiconductor stock that was down and out not so long ago.
Another analyst that recently heaped some praise on Nvidia is Eric Ross, chief investment strategist for New York City-based fundamental research firm Cascend Securities.
“We see hyperscale AI development work continuing to grow off this summer’s strong AI push,” Ross said in a recent note to clients.
Ross has a new 12-month price target of $220, $30 higher than his previous target, providing 13% upside on its stock.
While AI is Nvidia’s most significant growth driver, it’s not the stat I believe investors ought to pay the closest attention to when it announces earnings next month.
Stock Buybacks Ought to Be On the Agenda
In late August, I argued that Nvidia ought to be buying back its stock as it was cheap compared to its all-time high of $292.76, reached in October 2018.
Unfortunately, the company is on record stating that it won’t buy any more of its stock until it closes the Mellanox Technologies (NASDAQ:MLNX) acquisition. That’s expected by the end of the year.
As I said in the beginning, Nvidia stock is up more than 30% since it last announced earnings in August. At that point, NVDA had fallen below $148.
The company repurchased $700 million of its stock in Q4 2019 at an average price of $134.51, well below the quarter’s midpoint price of $173.23. So far in Q3 2020, it has a midpoint of $173.34, not much different than in the fourth quarter.
If NVDA stock keeps moving higher, the return on its investment on buying back its shares won’t be nearly as high if it waits until the next calendar year.
Perhaps it’s foolish to think Nvidia would buy back any stock in the third quarter given it already said it won’t do so until 2021.
However, if it does indicate it bought back stock when it reports Nov. 14, no matter how small the amount, it tells me not only is Nvidia confident about its future, it’s also optimistic that a global recession isn’t in the cards.
The Bottom Line on Nvidia Stock
A big difference between NVDA and its primary competitor, Advanced Micro Devices (NASDAQ:AMD), is that it generates significant free cash flow. For me, that is one of the most important indicators of financial strength you can have.
So, come Nov. 14, I’ll also want to see how Nvidia’s free cash flow is holding up.
If it’s doing well and it’s buying back stock, I don’t think anything is getting in its way of hitting $250 before the end of 2021.
I guess we’ll know soon enough.
At the time of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.