Do You Buy NVIDIA at This Valuation?

Last week, NVIDIA (NVDA) delivered a quarterly report and outlook that gave faithful investors enough reasons to stay "long and strong."

And this after a big new competitive threat from Alphabet (GOOGL) which I explain in detail (and pretty pictures) in this video and article...

Google Ramps Assault on NVIDIA AI Throne

While NVIDIA remains dominant in many new datacenter applications, including the core AI applications of machine learning (training) and deep learning (inference), we should intuitively know that major tech players like Intel (INTC), Microsoft (MSFT) and Amazon (AMZN) are not sitting idly by and letting the industry hardware and software capabilities be dictated to them.

Nonetheless, the king still appears ensconced for now. Following last Thursday's earnings report, the average price target on NVDA shares rose to over $275, even included the bearish view of the Wells Fargo semiconductor analyst David Wong.

What's a Fair--and Safe--Price to Pay?

But with all the new $300 price targets (coming up, I share 20 of the top moves), it's fair to wonder if NVDA is still a safe investment, and over what time period.

I know many investors who are hanging on to gains of double and triple in NVDA and their conviction is strong to stay long because they view the company as a a dominant disrupter, a game-changer for so many industries it has helped create in big data research and monitoring, automation, autonomous vehicles, and many other advanced software applications.

They envision the stock above $300 one to three years from now so they don't care about the short-term volatility if it should rally to $275 and fall back below $250.

Meanwhile, I also know many agile traders who prefer to trade the swings from quarter to quarter. They can pick good entries when the crowd is fearful and then ride the next wave of euphoric chasing up to new highs above $275 sometime this year. But as always, they will have to be quick and careful if it's only a trade.

To give you more background on the new fundamental and technical trading range for NVDA shares, the following is excerpted from my TAZR Trader commentary given to subscribers on Saturday May 12...

NVIDIA Continues to Impress

Another solid beat and raise quarter from the "King of AI" showed that Gaming demand remains strong in the current quarter on continued blockbuster titles and e-sports strength. And in Data Center, mid-single-digit percentage sequential growth and strong year-over-year growth look to continue their trends.

All the noise about slowing Crypto isn't even worth our time to discuss since any reasonable investor/analyst knew that this was just temporary gravy and not a core business unit.

And so the price action in NVDA on Friday was predictable and comical. Sellers couldn't even touch $250 and shorts were getting worried. Especially with more beefy price target bumps...

PT to $340 at BofA/ML: Vivek Arya says "Leadership in AI" rules stock sentiment/valuation

PT to $325 at Needham & Co: "Dominating in AI Today and Future plus Auto Tailwinds"

PT to $320 at Jefferies: "Another Blowout - Crypto DeRisked"

PT to $316 at SunTrust

PT to $315 at Rosenblatt

PT to $310 at Goldman Sachs: "Data Center Strength Makes NVIDIA A Buy"

PT to $300 at Sanford Bernstein

PT to $300 at Citi on 1Q Beat: "Old Bull Case is Now Base Case; New Bull Case = $380"

PT to $300 at RBC Capital

PT to $300 at Barclays

PT to $300 at B.Riley/FBR: Estimates rise "meaningfully" as further catalysts persist

PT to $280 at Mizuho Securities

PT to $273 at Morgan Stanley

PT to $266 at UBS

PT to $260 at Deutsche Bank: "Channel and Crypto Drive Upside"

PT to $255 at MKM Partners: "Valuation = Not a Buy"

PT to $255 at JPMorgan

PT to $250 at Susquehanna

PT to $243 at Stifel: "GPU Use Expands in AI, Gaming, Visualization & Crypto Mining"

PT to $140 at Wells Fargo (David Wong persists in his bearish stance, against all reason)

And from my favorite chip analyst, William Stein over at SunTrust, we get this measured optimism as always...

SunTrust analyst William Stein raised his price target on NVIDIA to $316, saying that while concerns around crypto unit volume may cause profit-taking, the company would have beat expectations even excluding that segment. The analyst adds that NVIDIA fits his mold that favors "structural growth stocks" based on its performance in the datacenter, gaming, and potential for automotive businesses. Stein raised his FY19 (ends January) EPS target to $8.23 from $8.08.

I also like the somewhat tempered enthusiasm of the analyst at Citi, who explains why his Bull Case is now $380...

Citi analyst Atif Malik raised his price target for NVIDIA to $300 following Thursday's Q1 results. Strong gaming demand coupled with the strength of the Volta architecture in the data center have driven NVIDIA's revenue and earnings higher and faster than expected. Malik continues to see upside in the stock and take his bull case for shares up to $380.

And RBC's Mitch Steves makes some good points about the revenue growth and business model leverage...

RBC Capital analyst Mitch Steves raised his price target on NVIDIA to $300 and kept his Outperform rating after "another material beat" in the latest reported quarter, adding that the margin of revenue outperformance also exceeded the prior beats. Steves noted that even though the gaming sector was "a bit lighter", it is offset by "significant" expansion in operating and gross margins, highlighting the clear and dominant leverage in the company's model.

Who Wasn't Impressed?

Besides the staunch bear at Wells Fargo -- David Wong believes competition will easily rise, thus cutting into NVDA's sales and making its valuation ridiculous -- I think we also need to pay attention to the reasonable analysis and views of those who were not so impressed, given the current rich valuation...

Deutsche Bank analyst Ross Seymore raised his price target for the shares to $260 from $240 but continues to believe the company's growth potential is fairly reflected in the "premium valuation." He explains his "Hold" rating by noting that while NVIDIA's growth remains "strong across virtually every segment," the quality of Q1's beat was "somewhat lower" as GPU channel fill and cryptocurrency delivered the majority of the upside, while Data Center was slightly below expectations.

MKM Partners analyst Ruben Roy raised his price target on NVIDIA to $255 after another beat-and-raise quarter, noting revenues saw broad growth across all segments. While Roy acknowledged that management warned crypto-based demand and related revenue are expected to decline to roughly 1/3 of the Q1 level in Q2, he's also concerned about seasonal fluctuations in Gaming that make it difficult to assess how the company's leading segment performs the rest of the year. His "Neutral" rating is based on a view of the company's valuation as "meaningfully higher" than that of its peers.

And Stifel Nicolaus analysts explain their valuation call that is typical of many who want to curb their enthusiasm...

"12-month target price to $243 from $220, based on 33X our upwardly revised FY2019 non-GAAP EPS estimate."

That's it. Just 33X. That's all they want to pay. This sentiment is what we began to notice during this recent market correction: the market as a whole did not want to pay more than 40X anymore as the hot segment growth rates potentially cool.

But we need to break that down a little more. First, a picture that's worth a thousand-fold increase in computing power. The below graphic comes from an NVIDIA presentation that I used in my special report for Zacks Confidential from last December The Technology Super Cycle ...

Clearly, what NVDA is doing with GPU semiconductors to fuel the advance of AI is beyond anything we've witnessed before in technology. If you need a primer on what a GPU chip is and how it works to create AI, check out my video blog from early 2017 (only 9 minutes!)...

Get Your MPA in Deep Learning

Where Do You Buy the King of AI in this New Valuation Range?

The valuation math from Stifel Nicolaus analysts is based on a FY19 (ending in January) EPS of $7.36 which is slightly above consensus.

But let's give growth investors the benefit of the doubt and look out to next year's consensus of about $8.

What should we pay for that?

More importantly, what will the other guy pay for projected slowing 13% top and bottom line growth?

30 X $8 = $240

35 X $8 = $280

We appear to be right in the middle of the new, more conservative valuation range. (Don't let the high Street targets above $300 fool you into thinking we get there this summer, although anything is possible in markets).

But this type of valuation battle never bothers me in a growth story like this, especially in a strong market where novel growth is sought and rewarded.

I've often said in the past two years that you could pay up to 40X for NVDA's forward earnings stream. That is getting harder to do as the growth rate slows and the crowd behavior wears off.

But I don't mind paying 35X as I believe other larger investors will be doing so for the long-term.

So, I will play this new valuation range for all its worth, as a buyer inside 30-35 times and a seller on rabid chasing up to 40X.

And it will get up there again, whether by August or December.

Disclosure: I own shares of NVDA for the Zacks TAZR Trader portfolio.

Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader service. Click "Follow Author" above to receive his latest stock research and macro analysis.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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