The past few months have been good for Nvidia (NASDAQ:NVDA). Nvidia stock has rallied from $164.58 at the open September 3 to $210.89 at the close November 22. With the company beating earnings estimates, and trade war fears simmering down, things are looking up.
But is it too late to get into Nvidia stock? Shares continue to trade at high forward price-to-earnings (forward P/E) and enterprise value/EBITDA (EV/EBITDA) multiples. On the other hand, with Nvidia’s growth catalysts in motion, shares could experience additional upside.
Let’s take a closer look, and see whether the NVDA stock price today is a smart entry point.
A Closer Look at Nvidia Stock
Nvidia announced earnings on Nov. 14. For the quarter ending Oct. 27, 2019, Nvidia’s revenue figures were down from the prior year’s quarter ($3.01 billion vs. $3.18 billion). But, sales were up from the prior quarter ($2.58 billion). Earnings per share (EPS) also came in higher than projected, with EPS actuals of $1.78/share, versus estimates of $1.57/share.
This quarter’s strong results are thanks to strength in Nvidia’s gaming business.
As Nvidia CEO Jensen Huang put it, “Our gaming business and demand from hyperscale customers powered Q3’s results.”Pivoting towards key long-term catalysts for Nvidia stock, Huang continued, “This quarter, we have laid the foundation for where AI (artificial intelligence) will ultimately make the greatest impact.”
This is one reason why investors have bid up NVDA stock higher. Nvidia is on the right side of AI, as well as emerging technologies such as 5G. With Nvidia’s GPUs powering these new technologies, the company could see game-changing growth.
The analyst community agrees. Bank of America raised its price target from $250 to $275/share, based on Nvidia’s re-acceleration in existing markets, as well as expansion into AI, 5G, and edge computing. Cowen also raised its price target, from $195 to $240/share. Based on Q3 results, Cowen believes the company’s growth in the data center and gaming markets is back on track.
But are the bulls getting ahead of themselves? While Nvidia is getting back on track, it’s yet to reach last year’s high water mark. Trailing twelve-month (TTM) revenue is $10 billion, versus $11.7 billion for the fiscal year ending January 2019.
Nvidia stock has rebounded quicker than the underlying business. Similar to the situation with competitor AMD (NASDAQ:AMD), Nvidia stock may be “priced for perfection.”
The Recent Rally and Nvidia Stock
In prior analysis, I have remarked how NVDA stock, along with shares in GPU rival AMD, trade at a premium to the other chip names. Despite the recent headwinds, investors are bullish on future trends. Shares in Nvidia currently trade for 49 times forward earnings and have an EV/EBITDA ratio of 48.7.
These multiples are leaps and bounds ahead of Intel (NASDAQ:INTC), which trades for 13.2 times forward earnings, and has an EV/EBITDA ratio of 8.4. But relative to AMD, Nvidia stock is cheap. AMD trades for 92.7 times forward earnings, and has an EV/EBITDA ratio of 78.1.
As I’ve written before, does this make Nvidia a bargain? How about no! Irrational exuberance may be helping out AMD stock a whole lot more, but that doesn’t make NVDA a deep value play.
Nvidia is being valued on future potential, not current performance. Using traditional valuation metrics may not help you out when trading Nvidia stock. Going short could burn you if the company makes a potentially game-changing announcement.
Conversely, going long NVDA could burn you if one of its many risk factors accelerates. As of recent, news on the U.S.-China trade war has been positive, but until both parties put it in ink, trade war fears remain a major risk.
Competition is also heating up for Nvidia stock. And not just from long-time rival AMD. As InvestorPlace’s Chris Markoch wrote last week, Intel is launching its first graphics card in over 20 years. Nvidia is already competing on price and performance with AMD. If Intel throws its hat in the ring, margins could take a hit as the company tries to maintain its market share.
The Bottom Line on Nvidia Stock
NVDA is what you call a “story stock.” The ebb-and-flow of its share price is driven by investor expectations. With an improving situation for Nvidia’s core gaming and data center businesses, investors have jumped back on the train. With emerging trends like AI and 5G, the company stands to win big going forward.
But the other chip names are gunning for the same markets. All bets are off whether Nvidia will win in the 2020s. But at the current valuation, investors who want to enter NVDA stock today must make a pricey bet.
As of this writing, Thomas Niel did not maintain a position in any of the aforementioned securities.
