Nvidia (NASDAQ:NVDA) is up 13% since I wrote it up on Oct. 8, at $187.11, when I recommend it as showing clear signs of a turnaround. And Nvidia stock is also up 34.7% since I featured it on August 23, 2019, at $156.86 per share.
As it stands, Nvidia now has a relatively full valuation. According to analysts polled by Seeking Alpha, its 2020 P/E ratio is now over 39x January year-end earnings. It is also over 29x 2021 year earnings.
Nvidia will report its Q3 earnings on Nov. 14. Analysts are projecting $1.47 EPS, which is 26.6% higher than its Q2 2020 earnings. But this will still be 14.7% lower than its year-ago earnings of $1.84 per share. This can be seen in the table here.
Part of the reason for this is because Nvidia is projecting much improved gross margins, as I pointed out in my previous article on Nvidia. The company is projecting an increase to 62.5%, plus or minus 0.5%, up from 60.5% last quarter.
A year ago its gross quarterly margin was 63%. So you can that the projections for Q3 2020 are forecasted to be slightly below those of last year. Look for the company to outperform these projections.
In fact, Nvidia stock is depending on these projections. The higher P/E ratio pf NVDA stock more or less requires outperformance by the company.
Nvidia’s Financial Health
Nevertheless, Nvidia is extremely healthy financially. As I pointed out in October, NVDA has $8.5 billion in cash, no debt and is free cash flow positive. Its latest Q2 filings showed that its free cash flow was $823 million for the quarter, and this represented 89% of its net income of $923 million.
I estimate that NVDA will have accumulated $10.7 billion in cash by the end of the year. NVDA has suspended its share buybacks until then. After its purchase of Mellanox Technologies (NASDAQ:MLNX) is completed at the end of the year, it will still have over $3.8 billion left over.
The Bottom Line on Nvidia Stock
NVDA is now back on a growth path. In October I wrote that the market sees Nvidia as a “Growth-at-a-Reasonable Price” stock. So unless the Q3 earnings are dramatically different from what the company projects, Nvidia is likely to stay steady or rise after a period of selling if it misses.
Better to wait until the earnings come out before taking a big position in Nvidia. There may be a chance to buy it at a cheaper price as high-flying stocks like this tend to sell on the news.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers a two-week free trial.