Nvidia: Can Growth Outweigh Valuation Concerns?
During the last decade, there are few stocks that have performed better than NVIDIA (NVDA). During the last decade, NVDA shares have produced total returns north of 2,788%. During the last 5 years, NVDA shares have risen more than 1,405%. During the last year alone, NVDA shares are up 150.9%. However, year-to-date, NVDA shares have struggled, falling 2.55% (which trails the S&P 500’s 4.7% gains by a wide margin).
What’s more, at today’s $513/share price, NVIDIA has fallen approximately 16.5% from the 52-week high of $614.69 that it set in mid-February. This relative weakness has inspired a lot of chatter amongst analysts, journalists, and investors alike. Frankly put, opportunities to buy NVDA shares into weakness has been rare over the years. And, with the aforementioned total return results in mind, we’re not surprised to see NVDA’s recent sell-off creating a lot of buzz.
Of the 4 and 5-star rated analysts that Nobias tracks, 6 have updated their outlooks for NVDA since the stock’s recent sell-off began. The average price target of these 6 individuals is $690. Harsh Kumar of Piper Sandler has the lowest updated target, at $625/share. Rajvindra Gill, of Needham, is the most bullish of the analysts who’ve published reports since 2/25/2021, with an $800 price target.
Of the 4 and 5-star rated journalists and bloggers who’ve published recent articles on NVDA, the Nobias algorithm is seeing a more balanced outlook, with 16 bearish opinions, 3 neutral opinions, and 23 bullish opinions.
NVDA has been such a popular ticker in recent years because its products and services offer investors exposure to a handful of the most exciting growth markets in the digital era: artificial intelligence, automation, cryptocurrency, data center, gaming (digital entertainment).
The biggest argument negative that we see being made by NVDA bears revolves around the company’s high valuation. The Motley Fool author, Nicholas Rossolillo noted NVDA’s valuation in a recent article, saying “Let's get the argument against NVIDIA addressed right out the gate. Even after falling more than 20% from all-time highs, this is a pricey stock at over 14 times expected 2021 sales and 66 times trailing-12-month free cash flow.”
He goes on to highlight the cyclicality of the semi-conductor industry and the intense competition that NVIDIA faces, threats related to cryptocurrency mining that NVDA uniquely faced (if governments around the world decide to regulate crypto, then NVDA could see a huge demand headwind in the GPU space since its chips are favorites amongst bitcoin miners).
However, even with these headwinds in place, Rossolillo remains bullish on NVDA’s growth prospects, saying, “NVIDIA is powering autonomous vehicle and robotics development for many auto manufacturers and industrial companies. Before too long, those segments will start to produce.” He also highlights NVDA’s ARM Holdings acquisition, which in his view, “could launch NVIDIA from niche chip designer to a complete ecosystem on par with the breadth of Intel's (INTC) offerings.”
In conclusion, after proposing the question, “is NVIDIA a safe stock?” Rossolillo answers, “If volatility equals risk for you, then no, this isn't a safe stock. But if you're looking for a surefire innovator that's gobbling up market share and growing at a rapid pace, this is a fantastically safe stock to own for the 2020s.”
Recently, the biggest tug-of-war, from an operational standpoint, has been between gaming demand and the crypto markets. In short, NVIDIA’s GPUs are great for high level gaming, but also for mining crypto currency. Anders Bylund recently published a piece of NASDAQ.com, touching upon the crypto demand, saying, “Specifically, NVIDIA's graphics processors are very efficient at mining Ethereum (CRYPTO: ETH) tokens and the smart-contract cryptocurrency has seen prices skyrocket 568% over the last year. If Ethereum miners are buying tons of NVIDIA's graphics cards, that leaves fewer units on store shelves for actual gamers.” One would assume that heightened demand created by multiple buyers would be a good thing, but in the past, the volatility created by crypto has been troubling for investors.
With regard to gaming, 5-star analyst Harsh Chauhan of The Motley Fool recently said that NVIDIA “dominates the discrete graphics cards market.” There are investors who believe that NVDA’s rival in the graphics processing unit space, AMD (AMD) is making up ground on NVDA, which is widely believed to be the market leader; however, Chauhan says otherwise, noting that recently, AMD “has fallen further behind in the battle for GPU supremacy, and NVIDIA could heap more pain on its rival.”
Across the semiconductor space, there is a supply shortage right now that is expected to hurt sales of all of the major companies operating in this segment. However, Chauhan’s piece highlights NVIDIA’s strategy to adapt by “ramping up the production of older-generation graphics cards to address the end-market demand.” He says, “The accessible pricing of these cards and their inability to mine cryptocurrencies could help NVIDIA dish out more chips for gaming enthusiasts.”
Growth in the gaming space is secular and therefore, this move should help NVDA to maintain its sales growth throughout a difficult time for its peers. It demonstrates the company’s dedication towards the gaming space, which has the potential to generate goodwill amongst the gaming community, which is very passionate about its GPUs. Also, the move helps to protect NVDA from the volatility often associated with crypto mining.
In a March 4th article, John Ballard, a tech analyst for The Motley Fool, points out that in 2018, when the bitcoin bubble burst, “NVIDIA's gaming segment suffered an oversupply of chips, causing sales of graphics cards, and the chip maker's stock price, to fall sharply.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Uncertainty is something that Wall Street absolutely hates. This focus on gaming, as opposed to the more speculative crypto mining scene, is something that institutional investors (who tend to drive trading volumes and share price direction in the short-term). Looking at NVIDIA’s most recent quarter, Ballard highlights the company gaming segment, which “posted a record $2.4 billion in revenue in the fiscal fourth quarter, growing 67% year over year.”
If this level of growth is sustained, in any way, shape, or form, then it becomes much easier for investors to rationalize the premium multiple being placed on NVDA shares. And, it appears this is likely, in the short-term, at least. In another recent article, in which he calls NVDA the “hottest growth stock to buy right now” Chauhan highlights recently provided guidance by the company which “calls for 72% revenue growth over the prior-year period to $5.3 billion, crushing Wall Street's estimate of just $4.51 billion.”
In that same article, Chauhan also noted that during the most recent quarter, NVDA’s data center segment, which was recently a cause for concern for investors, due to rising competition, poised revenue that “nearly doubled year over year to $1.9 billion, producing 38% of its total revenue.” If the company is able to produce this level of growth while actively taking steps to reduce demand from crypto miners, it will be an impressive feat that reduces anxiety around cyclicality due to the secular growth tailwinds that the gaming and data center markets possess.
Disclosure: Nicholas Ward has a long position in Niudia. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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