Why Nvidia Corporation (NVDA) Stock Still Has More Room to Run

For Nvidia Corporation (NASDAQ:NVDA), analysts giveth, and analysts taketh away. It was just three months ago that a pair of downgrades from smaller sell-side firms sent NVDA stock tumbling. After BMO Capital Markets and Instinet both cut Nvidia stock to the equivalent of a ‘sell’ rating, the shares fell 10%, dipping below $100.

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NVDA stock did it again in early April, with a downgrade from Pacific Crest again pushing shares back to the double-digits.

Those analysts were wrong — at least in the short-term. Buoyed in part by a stellar Q1 earnings report, Nvidia stock has risen 42% in less than six weeks. In response, the bullish analysts are getting investor notice. RBC, Bernstein and Goldman Sachs have raised their targets after earnings and a key announcement at a technology conference this month. That optimism has helped NVDA stock add to its post-earnings gains.

I was wrong, too, seeing Nvidia stock as dangerous as recently as late March. But the Q1 numbers helped the case for the stock. And recent developments only strengthen the case. Valuation still is worrisome after the recent big gains. But there are reasons why NVDA stock could have yet another leg up.


Sentiment Toward Nvidia Stock Has Changed (Again)

To be sure, NVDA bears still are out there. The analysts who were cautious or negative on Nvidia stock generally remain that way. Short interest in the shares has ticked up modestly so far this year.

But that short interest also plunged at the beginning of the year, hitting its lowest levels in almost five years. Admittedly, that’s not necessarily a good thing from a trading standpoint, as short-covering clearly has helped the 800% run in NVDA from mid-2015 levels. Still, it shows that the bears perhaps don’t have the heft — and certainly not the size — that they used to.

Meanwhile, one concern for Nvidia stock was that it moved so much in response to downgrades from smaller firms. Clearly, there were some “weak hands” holding the stock. The huge Q1 beat, and strong Q2 guidance, certainly help from that standpoint. And a chorus of analysts willing to defend Nvidia should continue to help going forward.

Nvidia’s Growth Opportunities Are Intact

The core of my concern toward NVDA stock was that earnings still relied on the gaming market. While automotive and data center opportunities get a fair amount of coverage, GPUs are still driving revenue and revenue growth. That’s a cyclical business — one reason why just three years ago, Nvidia sales declined in its fiscal 2014.

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Gaming still is the core of NVDA’s business, accounting for 53% of Q1 revenue. But Datacenter sales nearly tripled year-over-year, providing another base for overall growth. The announcement of a new TPU chip this month further improves the mid- to long-term outlook. The declining ‘OEM & IP’ segment, meanwhile, steadily is becoming a smaller drag on the top line, dropping from ~15% of sales in Q2 FY16 to just ~8% seven quarters later.

I still question whether Automotive is quite the opportunity Nvidia bulls suggest. Competition will be fierce. In particular, Intel Corporation (NASDAQ:INTC) will be a strong competitor after its purchase of Mobileye NV (NYSE:MBLY). But with datacenter already on its way to being a $2 billion revenue business, and years of growth ahead, NVDA’s reliance on gaming should diminish regardless. And its ability to grow revenue should last beyond the end of the current gaming cycle.

NVDA Stock: The Valuation Isn’t Ridiculous

Nvidia stock isn’t cheap, at ~39x FY19 consensus earnings-per-share plus cash. But investors will generally pay for growth, particularly in a chip space where growth is exceedingly difficult to find.

It’s a high multiple, but it’s not so high that NVDA can’t grow into it. And as long as gaming holds up and the opportunities elsewhere appear intact, Nvidia will have the opportunity to do exactly that.

Again, there are risks, and we’ve seen sentiment toward NVDA stock swing rather sharply, and quickly, over the last few months. I wouldn’t blame investors who are holding out for a lower price on Nvidia stock. And I wouldn’t be surprised if that lower price arrived at some point this year.

But NVDA at the very least has countered a lot of the bearish arguments toward its stock, between earnings and new product development. Nvidia isn’t a one-trick pony anymore. In fact, it looks much more like a thoroughbred.

As of this writing, Vince Martin has no positions in any securities mentioned.

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