There’s no doubt the future remains bright for Nvidia (NASDAQ:NVDA). But, will that translate into further gains for Nvidia stock? With its novel coronavirus tailwinds priced-in, shares have tread water since September.
And, as we enter 2021, expect this to continue. Sure, with many factors on its side, this chip powerhouse isn’t a name you want to bet against. Even as vaccine progress minimizes the appeal of “stay-at-home economy” stocks, this isn’t a binary play on a continued “new normal.” If and when we return to the “old normal,” Nvidia can still “crush it.” And barring an overall stock market correction, I don’t see the company giving up much of its 2020 gains.
So, what’s the play now as shares change hands around $530 per share? For those who bought in at much lower prices, it’s too early to throw in the towel just yet. But, for those looking to buy this now, in the hopes shares rally another 30%, 50%, or even 100%? Look elsewhere. With its valuation stretched, there’s little room for additional big gains in the near-term.
There’s More to Nvidia Stock Than Just Pandemic Tailwinds
The “stay at home economy” may be on the way out, despite Covid-19 continuing to wreck havoc in North America and Europe. But, even as things point to a return to the “old normal” sometime in 2021, Nvidia remains firmly in the catbird’s seat.
How so? Firstly, as seen from its third quarter (ending Sept. 30) earnings release, the company continues to top expectations. Handily beating Wall Street estimates, the company’s fourth-quarter guidance shows upcoming results could be even more impressive than analysts had previously handicapped.
Secondly, continued demand for the company’s GPU chips among end-users in fast growing areas like artificial intelligence (AI), cloud computing and gaming. In fact, analysts at Bank of America see these secular growth trends as a reason why Nvidia can continue delivering double-digit sales and earnings growth in the coming years.
Thirdly, as InvestorPlace’s Tom Taulli discussed Nov. 30, competition with rival Advanced Micro Devices (NASDAQ:AMD) is getting more intense. But, with both companies chipping away at dinosaur rival Intel’s (NASDAQ:INTC) legacy dominance in CPUs, there’s plenty of room for the company to continue gaining ground in this part of the semiconductor sector as well.
With many factors on its side, it’s hard to see shares heading lower from here. But, with the aforementioned catalysts fully priced-in, the potential for additional gains looks slim in the near-term.
It’ll Take a Market Correction to Send Shares Lower
Sure, with shares changing hands at a forward price-earnings (P/E) ratio of 46 times, it’s safe to say valuation is a major concern with Nvidia stock. But, with value taking a back set to growth so far this year, its rich multiple hasn’t made a dime of difference among investors overall.
With this in mind, I don’t see valuation concerns being what fuels a potential sell-off in Nvidia. It’ll take something major, like an overall market correction, this take the wind out of it. And, as markets remain strong in light of all 2020 has thrown at us, it’s hard to say whether a correction, crash, or selloff is going to happen in the coming year.
Yet, just because a pullback isn’t in the cards anytime soon doesn’t mean this stock will resume rallying in 2021. That is to say, I’m doubtful the stock will hit the ambitious $600-$700 per share price targets some of the sell-side have set anytime soon.
How so? As shares hold steady, it’s clear investors have priced-in its near-term prospects. And they are willing to pay a penny more. Expect this to continue, until the company catches up with its valuation.
After that, shares could continue trending higher as we progress in the 2020s. But, for the time being, don’t expect shares to rally 20%, or even 30%, in the coming months.
Hold if You Own It, Wait if You Don’t
Simply put, investors looking to this stock to turbocharge their portfolio in 2021 should look elsewhere. While plenty remains in motion to sustain its current rate of growth, investors have largely priced this upside into shares. With valuation stretched, shares have little room to run in the near-term.
But, that doesn’t mean those who bought Nvidia at lower prices should throw in the towel just yet. Sure, shares may not be heading higher in the next few months. And, while it doesn’t appear to be on the horizon, we could see shares take a dive if markets overall correct. Yet, after this happens, expect shares to resume heading higher.
Overall, for those who already own Nvidia stock, hold onto your position. But, for those who don’t own it yet? Take your time.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.
