Nvidia (NASDAQ:NVDA) and Nvidia stock continue their divergence. As a company, Nvidia continues to solidify its competitive advantage in areas that will drive the future of tech. However, NVDA stock has fluctuated wildly over the last year and possibly established a trading range.
This may leave investors confused about how to trade Nvidia stock. However, at current valuations and growth levels, investors should probably wait before opening a position.
Nvidia Has Become More Prominent, Less Valuable
The National Institute for Standards and Technology (NIST) continues to emphasize the need for a continuing focus on innovation by the semiconductor industry. Over the last few years Nvidia has innovated. Many now regard it rather than Intel (NASDAQ:INTC) as the most crucial semi company.
Nvidia’s innovation in areas such as artificial intelligence (AI), virtual reality (VR), and The Internet of Things (IoT) took Nvidia stock from below $20 per share in 2014 to an all-time high of $292.76 per share by October of 2018.
However, before it fell from those levels, the forward price-to-earnings (PE) ratio had exceeded 50. The chip glut and the selloff in tech equities devastated Nvidia stock.
After its drop in 2018 and subsequent fluctuations since then, Nvidia stock appears fairly valued. It now trades at a forward PE ratio of about 24. Moreover, profit growth has fluctuated. A trade war and a chip glut that appeared last year hurt profitability. Consequently, analysts expect earnings to fall by 18.8% this year. By next year, the chip glut should have ended, perhaps the U.S. and China will have worked through their trade differences by then. Hence, for fiscal 2020, analysts predict 31.5% in earnings increases.
Josh Enomoto also points to increased attention on Nvidia’s original niche, graphics cards. The GTX 1650 Ti graphics card should reinvigorate its competition with AMD (NASDAQ:AMD). InvestorPlace contributor Luke Lango sees many reasons for long-term optimism on NVDA stock. I agree with his thesis, but the question hinges on the degree of optimism.
Over a five-year time horizon, analysts expect profit growth to average 12.5% per year. While that should deliver respectable returns for investors, it falls short of the 52.83% average growth rate of the previous five years.
NVDA May Have Formed a Range
Investors may also need to worry whether Nvidia stock has become range-bound. The massive stock swoon during the fourth quarter of 2018 took NVDA down to a 52-week low of $124.46 per share. It has not seen that low since. However, it has not traded significantly above $190 per share either. Also, it came very close to retesting the 52-week low after reaching the $190 per share level.
Assuming Nvidia stock continues its move higher, traders should look for a possible double top around $190 per share. If it sustains itself above $190 per share, I think it can go to the $220 per share level.
I also would turn more optimistic as more consumers and businesses further incorporate 5G. 5G should exponentially increase the use of IoT and AI. It should also make better use of Nvidia’s work on self-driving cars. However, if it cannot stay above $190 per share, expect short and possibly medium-term stagnation.
Final Thoughts on Nvidia Stock
Investors should not buy Nvidia stock at its current price. Right now, it trades in the $176 per share range. However, trading over the last few months indicates that it may have established a top in the $190 per share range. Given its forward PE of about 24 and its long-term growth rate in the low double-digits, few fundamental-based reasons exist to buy at the current price.
Moreover, it has twice fallen below the $135 per share level. Should it revisit that level (or at least come close), investors might have a buying opportunity. Further, if the march of technology takes the company’s growth rate higher, I see Nvidia stock as a buy anywhere in its current range.
Still, without a catalyst or a significant drop in the stock price, I see few reasons to buy until conditions change.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
