A week ago, Nvidia (NASDAQ:NVDA) was trading for just over $200. Fast forward a week and NVDA stock is up 26%. If you were lucky enough to have bought last week, you are to be commended for your timing.
Now trading around $250, the easy gains appear to have been booked. To get to $300, we need to see the coronavirus disappear in a hurry.
If President Trump has his way, the world could go back to work after Easter Sunday. That would be good for most, if not all, stocks.
If Murphy’s Law strikes and the virus runs rampant, killing thousands of Americans in its wake, all bets are off for Nvidia and every other U.S.-listed stock.
Where’s NVDA Stock Headed?
For now, let’s assume neither extreme comes to pass, and the country maintains a lockdown in the most affected parts of the country like New York, New Jersey, Washington, and California.
Investors looking to nibble on stocks will likely opt for quality over quantity. The flight to quality will continue to focus on companies with strong balance sheets and excellent cash flow generation, two things Nvidia has in spades.
Needham analyst Rajvindra Gill upgraded the company’s stock to “buy” from “hold” on March 24, in part, because of its financial condition. The analyst highlighted the fact that it currently has net cash of $8.9 billion or $14.34 a share. That’s better than 20 of the 21 stocks in the semiconductor index.
InvestorPlace contributor Bret Kenwell recently suggested that Nvidia’s stock was a steal under $200. Bret put his money where his mouth is and bought some stock at $200. He’s one of those people I commended in the opening for exercising such great timing.
But he makes an excellent argument for buying the company’s stock.
“I don’t know when or at what price the market will have bottomed. What I do know is that the market topped on Feb. 19, one day before Nvidia shares hit a high of $316.22. Down more than $120 from that point, the selling seems overdone in my view. Or at least warrants a closer look by the bulls,” Kenwell wrote Mar. 24.
So, from its high in February, Nvidia’s stock is actually down 20% over 19 days of trading. That’s one percent per day. If that’s what happens to a quality company like Nvidia, I can see why mediocre companies have lost 60-70% of their value.
The flight to quality is real. Nvidia ought to be a part of that. Here’s why.
Many Levers to Pull
In my most recent article about Nvidia on Feb. 21, I argued that investors sometimes have to pay up for quality. This is one of those times.
Highlighting some of Bernstein analyst Stacy Rasgon’s thoughts on the company — Rasgon raised his target price on its stock by $30 to $360 — I emphasized that the company’s moves into artificial intelligence will pay dividends for shareholders for years to come. Kenwell makes some excellent points on this subject in his March 24 article. You might want to have a read.
However, for me, it’s not so much Nvidia’s strategy for AI, machine learning, and autonomous driving that has me convinced its stock would move higher in the months ahead, but rather its financial strength, something I alluded to earlier.
Those who are long AMD would argue that CEO Lisa Su has just as many irons in the fire as Nvidia, which should lead to higher growth over the next few years than its much bigger rival. Therefore, I would guess that these investors feel it’s unreasonable that AMD’s price-to-sales multiple is half Nvidia’s.
I would argue that Nvidia’s net cash of $8.9 billion — AMD has net cash of $1 billion — puts it in a much stronger position to weather any hit to sales and earnings from the coronavirus. If Nvidia were a fort, it would be Fort Knox.
I’m not knocking AMD. It’s just that I’ve been stressing Nvidia’s superior cash flow generation since last June, perhaps earlier. Nothing’s changed on that front.
Add to that everything Nvidia is doing in AI, the gains it’s expected to make in gaming in 2020 from new consoles entering the marketplace, and the fact data center revenues continue to remain healthy, makes it the obvious choice in semiconductor stocks.
Nvidia, in my opinion, remains a notch above AMD. I don’t think that’s going to change anytime soon. If you’re moving to quality, Nvidia is the superior stock to buy.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.