About a year ago, the prospects for Nvidia (NASDAQ:NVDA) stock looked grim. The company’s transition to its ray-tracing technology was limping along and the crypto market exploded. As a result, NVDA stock came under quite a bit of pressure as the earnings reports saw sharp declines on the top line.
But CEO Jensen Huang took swift action. And while the company has yet to fully recover, he has still done a standout job fixing the issues. The result is that Nvidia stock has come alive again. From early June, the shares have gone from $133 to $203.
So then what now? Can Nvidia stock keep up the momentum? Or should investors get cautious?
Well, let’s take a look at some of the positives. And perhaps the most important is the thawing of the U.S.-China trade war. Now this is not to imply that there will be immediate improvement. But then again, there should be much more stability, which should allow for longer-term commitments.
NVDA Catalysts
There are other strong catalysts for NVDA stock. Interestingly enough, the company is starting to get its stride with ray tracing. The fact is that the quality of the graphics is excellent.
For example, in the latest quarter, the gaming division reported revenues of $1.3 billion, up 24% on a quarter-over-quarter basis. Keep in mind that the category is being bolstered by trends like eSports and cloud-based platforms.
Next, NVDA should get a boost from the Mellanox Technologies (NASDAQ:MLNX) acquisition, although the regulatory approval is still pending. With this, the company will gain a dominant position in the high-end interconnections business, which is highly synergistic.
And finally, the long-term driver for Nvidia stock will be artificial intelligence. The company’s GPU technology has proven quite effective because of its ability to process huge amounts of data in parallel. That is, it’s much easier to create sophisticated models for deep learning.
While Advanced Micro Devices (NASDAQ:AMD) has made some progress in this market, Nvidia’s GPUs still remain the clear standard in the fast-growing AI market.
Here’s what Bank of America analyst Vivek Arya noted in a recent report: “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.”
In light of all this, Arya lifted the price target on Nvidia stock from $225 to $250, which assumes 23% upside from current levels.
Bottom Line On Nvidia Stock
Of course, Nvidia stock has some notable issues. Note that the MLNX deal could ultimately be blocked by the Chinese government, which would likely weigh on the shares. The fact is that the trade war truce is tenuous and could easily come undone.
Something else: Nvidia stock is already factoring in much of the good news as the forward price-to-earnings ratio is at about 28 times. By comparison, Intel (NASDAQ:INTC) trades at 14 times and Qualcomm (NASDAQ:QCOM) is at 19 times.
Granted, Nvidia stock does deserve a premium. But the current multiple still seems kind of rich.
This also could present some risks for the upcoming earnings report, which will be released on Nov. 14. Analysts expect earnings of $1.24 a share, compared to $1.67 a share in the same period a year ago. So even a slight miss could be a problem. Thus, for now, it may be best to wait before making a purchase.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
