Nvidia (NASDAQ:NVDA) stock has had a profitable October, increasing by about 15% for the month. A steadily rising price also helped Nvidia stock break through its range. As a result, it had recently reached its highest levels since the tech stock selloff in the fall of 2018.
Nonetheless, this recent move creates new short-term challenges for the stock. While it remains a long-term winner, Nvidia could suffer not so much from its valuation, but how that multiple compares to its peers.
NVDA Gained Traction in October
Admittedly, I did not see a recovery for Nvidia stock coming this quickly. However, with the company able to breach the $190 per share level in mid-October, NVDA stock has now escaped the range that held it down for nearly one year.
Still, Intel (NASDAQ:INTC) likely boosted the sector with its blowout earnings report, which beat estimates and took forward guidance higher. When Nvidia stock reports its earnings on Nov. 14, investors have good reasons for optimism.
For now, I see Nvidia stock as close to its fair value. NVDA trades at about $202 per share as of the time of this writing. That’s about 9% below the 52-week high of $222 per share. It could again approach that level, but I think it would need an additional catalyst to take it back to the record highs of the summer of 2018.
However, I do not see an obvious impetus on the horizon, particularly from profit increases. Yes, a profit decline this year should give way to an estimated 32% earnings increase for next year. However, over the next five years, analysts expect average annual earnings growth of 12.5%. While respectable, that falls short of the 52.83% average growth NVDA experienced over the previous five-year period.
NVDA Stock Compares Poorly to Its Peers
Despite my feelings about Nvidia stock, I see Nvidia as the most crucial chip company. Our own Josh Enomoto states that “innovation, not commoditization, will distinguish Nvidia stock.” I could not agree more. Nonetheless, Mr. Enomoto makes a long-term supposition. At this juncture, investors have reasons for concern regarding forward price-earnings (PE) ratio, which has now risen to around 28.
Investors should note that Intel trades at a forward PE of 12 despite the post-earnings boost. Also, NVDA’s forward PE makes it only slightly less expensive than rival Advanced Micro Devices (NASDAQ:AMD), which sells for 30 times earnings. However, analysts predict 36.81% average annual profit growth for AMD over the next five years, roughly triple that of Nvidia.
This differential has me questioning why traders would buy Nvidia stock at these levels. If one can get triple the growth and pay a multiple that is less than 10% higher, why should anyone choose Nvidia stock over AMD?
I say this despite criticizing AMD for not being able to break the $34 per share price ceiling. AMD trades for just under $34 per share at the time of this writing. However, if Nvidia stock can break out of its range, so can AMD. At this point, AMD stock offers more upside when the upper bound finally gives way.
Hence, the decision on whether to buy NVDA hinges on perspective. I like Nvidia stock long term. Short term, I have more neutral feelings. When comparing to the potential value AMD offers, I would not buy NVDA stock at these levels.
The Bottom Line on Nvidia Stock
Nvidia stock has a bright future long term, but for now, it does not compare well to its peers. Thanks to the run-up NVDA stock saw in October, its forward PE ratio has risen to 28. With average profit growth of 12.5% expected for the next five years, I see it as fairly valued.
Furthermore, Intel’s much lower PE ratio leaves more room for stock price growth. Moreover, AMD stock offers about three times the growth at a marginally higher multiple.
Over the long run, Nvidia will drive technology forward, both figuratively and literally. However, Nvidia stock prices in that innovation. When it comes to investing in the chip sector, Nvidia’s peers offer either cheaper or higher-growth options.
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.