Nvidia (NASDAQ:NVDA) is what one would call a strong stock in a strong place. After surging more than 81% last year, NVDA stock is up 5.37% in the early innings, beating the benchmark PHLX Semiconductor Index by almost 200 basis points.
With semiconductor stocks extending 2019s surge and growth and momentum stocks, of which Nvidia is one, continuing to top value, it seems like the path of least resistance is to be bullish on Nvidia. That doesn’t mean the sailing is always going to be smooth. In fact, not all of the analysts covering the chipmaker are enthusiastic about the stock.
“We are on the sidelines on NVDA, as we believe the company does not have sufficient earnings growth potential to justify its high valuation,” said Needham analyst Rajvindra Gill in a note out earlier this month, though he raised his rating on Nvidia stock to “hold” from “underperform.”
Nvidia next delivers quarterly results on Feb. 13 with Wall Street expecting earnings per share (EPS) of $1.34, up from 58 cents a share a year earlier. That report and any subsequent outlook for the current quarter will give the company a chance to justify what are in fact high multiples of 15.38x sales and 34.60x earnings.
Over the past four quarters, Nvidia’s average upside surprise is nearly 11%, so there’s a credible chance the company beats in decent fashion, potentially providing a near-term lift to the shares.
Competition and Opportunities Galore
One of Nvidia’s most widely mentioned (and it’s certainly relevant) traits regard is the hyper-competitive markets in which it operates, with much of that competitive pressure generated by Intel (NASDAQ:INTC) and Advanced Micro Devices (NASDAQ:AMD). That competition recently prompted price cuts on some chips by Intel and Nvidia to stave off AMD.
AMD, a high flier in its own right, is planning to release a high-end graphics processing chip later this year that, within the company, is being dubbed the “Nvidia killer.” Rumor has it AMD’s competitor could be as much as 30% faster than Nvidia’s RTX 2080 Ti.
With the emergence of artificial intelligence (AI), a theme that’s still in its formative stages, there are plenty of growth opportunities to be had for chipmakers.
“The slowdown in Moore’s Law means no more ‘free performance’ upgrades every two years,” said ARK Investment Management in a recent note. “As a result, the server industry will have to invest more in computing hardware. AI accelerator chips, which optimize deep learning workloads, generated $4 billion in revenue last year and should grow 36% at a compound annual growth rate (CAGR) to $18 billion in 2024.
Nvidia stock is a top 10 holding in the ARK Autonomous Technology & Robotics ETF (CBOE:ARKQ). For those that think AI deep learning is a fad, think again. It has significant potential for names like Nvidia, particularly if the arena adds $30 trillion to equity market capitalization by 2037 as projected by ARK.
Bottom Line on Nvidia
No, Nvidia isn’t a value stock and that’s just fine. Accessing fast-growing markets, such as AI and autonomous vehicles, along with expected spending increases in data center and video game spending usually doesn’t come with low valuations.
The data center market is poised to improve this year, likely setting a foundation for Nvidia to deliver deep double-digit revenue (probably in the 20% area or higher) and earnings growth (perhaps beyond 30%).
And while the stock isn’t going to move up in a straight line, $275 and beyond isn’t an unreasonable price forecast for Nvidia when considering its AI exposure.
As of this writing, Todd Shriber did not own any of the aforementioned securities.
