Nvidia (NASDAQ:NVDA) stock has been on a tear. The chip maker’s future prospects look brighter with an improving trade war situation. Shares have rallied from as low as $147.39 on Aug. 15 to $204.54 at the close Oct. 25. But what is the next move? With Nvidia stock trading at a high valuation, what catalysts are in play to send the stock price higher?
The trade war is not yet over. Yet, with the situation improving, NVDA stock could see an additional boost in value. Improving demand for GPUs in the gaming and AI industries could mean good times ahead in the coming years.
Does this mean it’s time to buy Nvidia stock? With shares richly priced, upside could be limited. Let’s take a closer look, and see why today may not be the best entry point.
Material Growth Across the Board
First things first, the trade war. Wall Street may have gotten ahead of itself. The market is banking on a deal being solidified. As a result, shares in companies with high trade war exposure have seen short-term boosts. This includes Nvidia stock.
But looking beyond the trade war, NVDA has many things in its favor. On Oct. 7, RBC analyst Mitch Steves boosted his price target for the stock. He believes shares “will be the best-performing large cap in our universe over the next six to nine months“. Certainly a bold statement. But across all business lines, the company is seeing material growth. For the data center unit, Steves sees 100% short-term improvement in sales.
Nvidia stock could see a big boost if earnings beat expectations. The company releases financials on Nov. 14. Last quarter, the company squeaked by with a revenue and earnings beat. Revenues came slightly above consensus ($2.58 billion vs. $2.548 billion estimate). Earnings per share (EPS) were $1.24, while estimate averaged at $1.15. With improved performance, analysts expected improved earnings this quarter. EPS consensus is $1.57 per share.
Another catalyst over the next year is a new generation of chips. Nvidia’s Ampere GPUs are “expected to offer performance far in excess” of Nvidia’s current GPU lines. With the company in battle for market share with AMD (NASDAQ:AMD), this development is a potential shot-in-the-arm.
With AMD beating them on price, performance is key to Nvidia’s future success in gaming. As InvestorPlace‘s Chris Lau discussed Oct. 23, NVDA wins on performance alone. But in terms of “performance-per-dollar,” AMD is the clear winner.
All of these factors could mean additional upside for Nvidia stock. However, on a valuation basis, shares remain overvalued. While the company may rebound, high expectations make the stock priced for perfection.
Cheaper than AMD but Still Richly Priced
Compared to rival AMD, Nvidia stock is cheap. Shares trade at a forward price/earnings multiple of 47.5x. The stock’s enterprise value/EBITDA (EV/EBITDA) is 43.7x. While for most stocks this would be a rich valuation, AMD’s valuation multiples are even higher.
AMD trades at 67.8x forward earnings, and an EV/EBITDA ratio of 68.9x. But does this make Nvidia stock a value play? Far from it! Nvidia trades at a substantial premium to other chip makers. Investors continue to value the GPU makers at higher multiples than other chip names. Broad-line chip makers like Intel (NASDAQ:INTC) trade at substantial discounts to both GPU names. Intel’s forward P/E is 12, and its EV/EBITDA ratio is 7.7.
Mobile chip-maker Qualcomm (NASDAQ:QCOM) also sells at a lower valuation. QCOM shares trade for 21.2x forward earnings, and an EV/EBITDA ratio of 8.9. Why does the market give the GPU makers higher multiples? Despite short-term headwinds, the market believes both companies have significant growth runway.
AMD and Nvidia stock stand to win big once AI reaches critical mass. But are their share prices getting ahead of themselves? As it stands now, both stocks are priced for perfection. They are vulnerable to material price declines if fundamentals turn away from their favor.
It May Be Too Late to Buy NVDA Stock
The opportunity to buy NVDA stock may have come and gone. Back in the summer, when shares tumbled on trade war fears, it may have been the right time to buy. But with investor expectations turning positive, upside could be limited.
If you bought NVDA stock at a lower price point, it may be prime time to cash in your chips. But for anyone taking a look today, the party may already be over. Long-term, the AI growth story may pay off for Nvidia shareholders. But if you are looking for a short-term trade, consider better opportunities elsewhere.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
