Can Nvidia Stock Really Meet Analysts’ High Expectations?

Investors have been looking for any reason to drive up Nvidia (NASDAQ:NVDA) stock. The stock went up in post-market trading after a positive earnings report, where NVDA reported earnings per share of $1.78. This result easily beat the FactSet consensus estimate of $1.58.

Can Nvidia Stock Really Meet Analysts' High Expectations?

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Revenue also beat analysts’ estimates. The chipmaker reported revenue of $3.01 billion as opposed to $2.92 billion. This was down 5% on a year-over-year basis, but given the entire semiconductor industry has been struggling, analysts applauded the near-20% revenue improvement from the previous quarter.

However, given a moment to look at a lower-than-expected forward guidance, the stock immediately gave up its gains. For the quarter ending in January, NVDA was predicting revenue of $2.95 billion which was lower than analysts’ forecasts for $3.07 billion.

Although NVDA stock was marching upward on Nov. 18, it is currently down 1.9% as of this writing. Some investors see this year as being the beginning of a 5G and Internet of Things (IoT) lift-off, which will be significant for the stock.

But, rise or fall today, one thing may stand in Nvidia’s way in the long term: its stubbornly high forward price-to-earnings ratio of 28.41. Some bulls are brushing aside that valuation as being inconsequential to the long-term growth of the stock. But, the 5G tide that is lifting NVDA is also lifting other semiconductor companies. And that means, from a value standpoint, there are better values to NVDA stock at current levels.

Is Nvidia Stock Priced for Perfection?

Analyzing the market is about predictive analysis. The problem is that predictions are largely based on what analysts believe should happen, not what will happen. Anyone that has played fantasy football can tell you about how predictions are only so accurate.

With a high valuation, belief in the bullish case for Nvidia’s stock means believing that everything will go right. That rarely happens.

Analysts Have Mixed Views on NVDA

The headlines for NVDA tend to be bullish. In fact, many analysts remain bullish on NVDA. Hans Mosesmann, an analyst for Rosenblatt Securities has a $240 price target for NVDA stock. According to Mosesmann, “October quarter results were strong followed by a slightly disappointing guide, but net/net we are positively biased for longer term investors.”

However, another analyst Joseph Moore of Morgan Stanley is seeing future gains baked into the current Nvidia stock price. In Moore’s estimation, the stock’s 35% rally since September is leaving very little room for error given its current valuation. Moore did raise his price target for NVDA to $217 from $180. This would be a 5% increase from the stock price as of this writing.

Overall, the consensus rating from 40 Wall Street analysts is a Buy. But the consensus 12-month price target is $216.99. The highest price estimate for NVDA is $275. The low price is $145.

Nvidia’s Growing Competition in GPU Segment

For the past 20 years, NVDA has had supremacy in the graphic processing unit (GPU) market segment. But with the emergence of artificial intelligence (AI), virtual reality, the Internet of Things and other innovations like autonomous cars, GPUs are even more important and bringing back in competition.

Intel (NASDAQ:INTC) will be launching its first graphics card since 1998. Nobody is suggesting Intel will be ready to knock Nvidia out of its supremacy in the space. However, with a stock that is trading at a multiple of around 11.7 forward earnings, will investors see INTC as a better option in the semiconductor space?

Nvidia Stock Remains Volatile

Nvidia bulls will justifiably point out that semiconductor stocks are notoriously cyclical. However, cyclical and volatile are two different things.

The stock is up over 35% in 2019. However, even with the recent surge in stock price, Nvidia stock is still down over 24% since the record high it reached in September 2018. And, the stock continues to trade a forward P/E ratio that is significantly higher than its peers.

This is the real issue that I have with Nvidia’s stock. If you’re comfortable with a stock that is forecasting a range of outcomes, then by all means buy the stock. But I prefer a stock with a bit more predictability.

And while the long-term view of NVDA looks great, in the short-term it looks like it’s still going to be a bumpy ride.

As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.

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