(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
NVIDIA Corp. (NVDA) has been one of the hottest stocks in the market over the past three years, skyrocketing about 10-fold in that time. These significant stock increases have come on the strength of NVIDIA's core business in graphics processing units (GPU) for gaming, along with the addition of massive growth in the data center unit. NVIDIA's gains may be far from over. Analysts' see the stock continuing to rise, by more than 10% to a new record high.
Earnings growth is expected to be huge yet again in fiscal 2019, with earnings seen climbing by 58% and revenue forecast to rise by 34.5%. One would think that with NVIDIA trading at 32 times fiscal 2019 earnings estimates, shares of the chipmaker would be dear, but when adjusting the earnings multiple for growth, it is anything but expensive.
Cheap When Adjusted for Growth
NVIDIA is currently trading at the lower end of the historical range of its forward P/E ratio, which at one point in 2018 reached as high as 54. But that multiple has come way down as earnings estimates have increased since the start of the year. Analysts estimates have climbed by about 72% to $7.79 per share, a growth rate of about 59% over last year's results. When adjusting the stocks earnings multiple for growth, the PEG ratio comes to about 0.55, well below 1, which is when the earnings growth equals the P/E ratio.
Lifting Price Targets
Because of the strong earnings growth, analysts have been raising their price targets on the stock since the beginning of the year. The average analysts' price target has jumped by over 28% to its current level. Some even see it rising to higher than $276. According to data from YCharts, the highest price target on the stock is currently $340, nearly 35% higher than its current price around $246 a share.
Will Need to Continue to Beat and Raise
But one area of concern, for now: Analysts are forecasting a significant slowdown for earnings growth in fiscal 2020 to just 9.6%. It makes NVIDIA expensive when comparing it to the 2020 earnings multiple of 29. When adjusting its earnings multiple for growth, the PEG ratio jumps to nearly 3. But as observed this year, those estimates may prove to be too low given the company's history of beating estimates and raising guidance.
The strong earnings and revenue growth for NVIDIA seems like reason enough for shares of NVIDIA to rise in the short-term. If the company can post better-than-expected results in the middle of August, then the stock likely has further to rise over the coming months.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.