As Nvidia (NASDAQ:NVDA) stock bounces back, should you buy the shares? The chip-maker has rallied, along with other high-flying tech names, in recent days. The coronavirus from China may continue to impact the American economy. But, per Mr. Market, things are looking up for large cap tech stocks.
But can this continue? We shall see. Nvidia’s underlying fundamentals remain strong. Yet, as valuation remains high, is now a smart time to buy? In light of global economic slowdown, can this company meet the high expectations baked into the share price?
That’s where my concern lies. Granted, I have been proven wrong as a Nvidia bear. When shares continued to make new highs, I implored investors to sell, given the company’s rich valuation. I continue to hold such a view on the name.
But, I concede that the bulls make a strong argument. With market support on their side, it’s tough to go against the grain with NVDA stock. With this in mind, let’s dive in, and see whether shares are worthy of a buy, or if investors should remain cautious jumping back into this rebounding “story stock.”
Why NVDA Stock Could Move Higher
At first glance one would think the coronavirus (COVID-19) would hamper Nvidia’s near-term prospects. With weakened demand from the largest economies, it seems like a no-brainer that CPU and GPU demand would take a short-term hit. Considering that the company’s high valuation is built around impressive growth, shouldn’t that cause the stock to head lower? Or at least, tread water?
Yet, the analyst community has good reason to be bullish on NVDA stock. Needham’s Rajvindra Gill recently upgraded shares to “Buy” from “Hold.” Giving the stock a $270 price target (share price at the time around $225 per share), the analyst cited strong demand for GPUs in medical applications. Also, Gill made the “flight to quality”argument. In other words, today’s macro uncertainty calls for investors to choose stocks with “superior balance sheets and robust free cash flow.”
In the weeks since Gill made that call, shares have reached prices close to his target. Nvidia stock closed at $265.59 per share on March 30. That does not mean all the upside is now priced into shares. But it could mean that shares are no longer oversold.
We may have reached a reasonable valuation for Nvidia. But the key risks I’ve discussed ad nauseum continue. Yet, it may still make sense for investors to “overpay” for this high-quality stock.
High Valuation, Decreased Earnings May Not Matter
As InvestorPlace’s Vince Martin recently wrote, valuation remains a concern for NVDA stock. Shares currently trade at a forward non-GAAP price-to-earnings (P/E) ratio of 35.6. And that’s using guidance from before COVID-19!
You could make the argument that Nvidia may not suffer much from the outbreak and its associated shutdowns. As Martin discussed, increased teleworking could help bolster demand, but its hard to see how the company meets its prior guidance if we enter a recession.
Granted, even their top rival, Advanced Micro Devices (NASDAQ:AMD) continues to trade at a rich multiple (43.8x non-GAAP forward earnings). But that’s far from saying Nvidia stock is cheap. Yet, even if actual growth falls short of expectations, the company’s share price could move higher. Even with a more inflated valuation.
Semiconductor analysts like UBS’ Timothy Arcuri see chip stocks like Intel (NASDAQ:INTC) and Nvidia as defensive plays. As this sentiment continues, I don’t see the stock’s multiple contracting anytime soon. Other than that, expect market movements to be the key driver of future price action.
As a major component of the NASDAQ 100 index, shares could continue to perform well. As Erich Reimer wrote recently on Seeking Alpha, the NASDAQ 100 as-a-whole could be a “relative safe haven.” Among major indexes, this gauge has the least exposure to COVID-19 risks.
If Mr. Market agrees, and the NASDAQ 100 recovers quicker than markets-in-general, Nvidia stock could still move higher. Even as its underlying valuation remains frothy.
It’s A Tough Call With Nvidia Stock
Long-term, Nvidia’s underlying business has a lot going for it. As InvestorPlace’s Matt McCall wrote March 19, catalysts like artificial intelligence, machine learning, remain at play. The company continues to be a standout in chips for data centers, gaming, and other growing industries.
To be sure, it’s hard to bet against NVDA stock. But do you want to overpay for quality, with the thought shares move higher? Depends on your objectives. If the company’s long-term runway outweighs near-term valuation concerns, then consider it an opportunity. Otherwise, look for other ideas that incorporate long-term upside, but trade at a more fair price.
Thomas Niel, contributor to InvestorPlace, has been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.