Nvidia Stock Looks Overvalued, But Shares Remain A Cautious Buy

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As shares head higher, should you chase Nvidia (NASDAQ:NVDA) stock? Yes and no. On one hand, with the novel coronavirus a tailwind, not a headwind, for tech names like this chip-maker, going bearish on this “story stock” hasn’t been the best play. Not only did shares quickly bounce back to pre-pandemic prices after March’s sell-off. Shares today trade more than 35% above where they were back in mid-February.

NVDA stock

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On the other hand, has the “new normal” really improved Nvidia’s underlying business that much? Or, with tech stocks one of the few winning plays post-outbreak, investors trading on FOMO and momentum have simply bid up shares to frothy levels?

How about a little of both. Today’s environment will likely help the company meets its sky-high growth expectations. But, if and when today’s hot market starts to cool off, we could see a correction in Nvidia stock.

Yet, it’s nearly impossible to time when exactly the music will stop. With this in mind, you can’t make a bear case for Nvidia based on valuation. In short, don’t fight the trend. But, as shares continue to trade well above historical multiples, don’t bet the ranch either.

Nevertheless, with earnings coming out Aug 19, buying today may be a solid short-term play. As seen with Advanced Micro Devices (NASDAQ:AMD) stock, a solid quarter could mean another epic rally. In short, a cautious buy may be warranted.

How NVDA Stock Could Head Even Higher

While they haven’t gone parabolic, Nvidia shares have trended higher since their March lows. As discussed above with AMD, is it possible for this stock to rip again, after its earnings and outlook release later this month?

Definitely! With pandemic tailwinds accelerating the company’s data center sales growth, the company could exceed expectations. And with better-than-expected results/guidance, the stock may wind up making an epic move higher. Similar to what we saw with Advanced Micro Devices.

But, along with this short-term opportunity, there’s a long-term play as well. With the move to accelerated cloud computing, the company’s above-average growth could continue through the decade.

And, and as InvestorPlace’s Faizan Farooque discussed Jul 31, the company’s potential in AI applications (think autonomous vehicles), remains a strong catalyst as well. Add in Nvidia’s continued strength in the gaming space, and there’s more than enough to build a long-term bull case for the stock.

Yet, while it seems certain the salad days will continue for Nvidia, there are a few caveats to consider. Granted, these are far from enough to make a bear case for the stock. But, these risks may mean those looking to take a long-term position should adopt a “wait-and-see” approach.

Why Buying Today May Not be The Best Move

There’s plenty of merit to buying Nvidia stock ahead of earnings. However, as shares trade well above $400 per share, there are some risks to keep in mind before you put in a buy order.

Firstly, valuation. Sure, as I’ve said previously, it’s tough to go short any “hot stock” on valuation alone. Shares could become even more overvalued, meaning big losses on a short position. Yet, today’s frothy multiple may be sustainable, and could contract as growth slows down.

Right now, NVDA trades at a forward price-to-earnings (P/E) ratio of 51.1. Granted, that’s far below AMD’s forward P/E (70.8). But, richly-priced compared to the other semiconductor plays out there.

Sure, this company’s growth rate warrants a rich multiple. Growth is why this stock and AMD trade at substantial premium to that of Intel (NASDAQ:INTC), which continues to underwhelm.

Yet, historically, Nvidia has traded at much lower multiples than where shares trade today. I don’t think the stock is going to return to a 20x forward P/E multiple. But, a contraction to 30x-35x is possible.

Secondly, the company is projected to see double-digit growth over the next few years. But, as this commentator discussed last month, this growth rate will slow down considerably between now and 2023.  While 2021 earnings growth is projected to be around 40%, earnings growth may fall below 20% by 2023.

Granted, a lot could happen between now and 2023. But, this does show that shares may have gotten ahead of themselves. As a result, they could tread water from here, or head lower, as the company grows into its valuation.

Consider NVDA Stock a Cautious Buy Ahead of Earnings

With the pandemic helping more than hurting Nvidia’s growth prospects, it seems foolish to go bearish. Even as shares have become richly priced. With earnings and outlook just around the corner, buying today may be a solid opportunity.

Yet, considering shares have moved too far, too fast, those looking for a long-term position may want to take a “wait-and-see” approach. Bottom line: don’t bet the ranch, but Nvidia stock remains a cautious near-term buy.

Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

The post Nvidia Stock Looks Overvalued, But Shares Remain A Cautious Buy appeared first on InvestorPlace.

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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