- Nvidia (NVDA), the graphics chip and artificial technology (AI) technology company, has seen NVDA stock fall dramatically in the latest market downturn. As of May 23, it’s down 44% from the end of 2021.
- Nvidia is set to release its earnings for the quarter ending April 30 on May 25. All eyes on NVDA stock will be watching its growth rate and management’s outlook for the rest of the year.
- Investors should start thinking about averaging into NVDA stock now that it is cheap at just 30 times forward earnings. Compared to its average 40x forward P/E in the last 5 years, the stock has a potential 30% upside.
Nvidia (NASDAQ:NVDA), the graphic processor and AI technology company, has dropped over 44% since the end of last year. Moreover, at $164.32 as of May 23, NVDA stock is down almost 50% from its all-time high of $333.76 on Nov. 29, 2021.
Now it’s always possible the stock could always fall further, especially if the Federal Reserve keeps jacking up rates and forces the economy into a recession. However, the stock price already discounts much of the potential damage going forward. It probably already discounts a global slowdown.
Nevertheless, the demand for semiconductor chips is still very high. In fact, analysts project that Nvidia’s revenue will rise 27% from $4.44 in earnings per share (EPS) last year to $5.65 in 2022. And for 2023, 38 analysts surveyed by Refinitiv forecast an average EPS of $6.74. This represents a forward growth rate of 19.2% next year.
So you can see that NVDA stock is falling not because analysts expect the company to start losing money. It’s lower simply because the growth rate in earnings per share will fall from 27% this year to 20% or so next year.
Where This Leaves Nividia Stock Going Forward
Frankly, that is a pretty good problem to have. It puts NVDA on a 29.5x multiple for 2022 and a forward P/E multiple (for 2023) of just 24.3x (i.e., $164.32/$6.74).
This is very cheap compared to Nvidia’s historical forward multiple. For example, Morningstar.com shows that its past 5-year forward P/E has averaged 40.2x.
This implies that the stock could be seriously cheap. If we apply this 40x multiple to the 2022 EPS forecast of $5.65, the resulting price target is $226.00. That is 35.5% over today’s price.
And if we apply the 40x multiple to the 2023 projection of $6.74, the price target rises to $269.60. The average of both is $247.80, which is 48.6% over today’s price.
But, just to be conservative, let’s apply a 30x multiple instead of 40x to each year’s forecast and then average them. The result is a price target of $185.85. This is still at least 11.5% over today’s price.
So it looks like NVDA stock is worth somewhere between 11.5% and 49% over today. That works out to a mean upside of 30% from today, or $216.76.
What Investors in NVDA Stock Should Do
All eyes will be on the earnings release set for May 25 covering its fiscal first quarter ending April 30. Analysts will want to see what the company says about its future outlook in terms of demand and its own revenue forecast.
As it stands now 44 analysts surveyed by Refinitiv have an average price target of $319.18, or 91% over today’s price. Moreover, TipRanks.com reports that 25 analysts have written on the stock in the past three months. Their average price target is $308.26, or 87.8% over today’s price. In addition, Seeking Alpha reports that 44 analysts have an average price target of $317.73, a similar price target.
These are all higher than my conservative estimate. But since everyone says the stock is too cheap, maybe investors should begin averaging into the stock. This way they can begin accumulating or lowering their average cost by buying at today’s cheap price.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.