Why Nvidia’s Bulls May Be Way Too Bullish

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Shares of Nvidia Corp. (NVDA) have soared in recent years, with the stock climbing by nearly 900% since April of 2015, while the S&P 500 has jumped by only 27.3%. Despite that sharp rise, analysts are growing even more bullish on the chipmaker raising their price target and earnings forecasts, since the start of 2018. (For more, see also: Nvidia to Gain on Cryptocurrencies in 2018: RBC.)

Analysts have increased their price targets on Nvidia to roughly $250 on average, nearly 13.5% higher than the current stock price around $220. But despite the lofty price target, analysts are relatively mixed when it comes to their recommendations with only 51% of the 37 analysts covering the stock rating it a "buy" or "outperform," according to data from Ycharts. 

NVDA data by YCharts

Analyst Raise Estimates

Consensus estimates are looking for the company to report that earnings grew by nearly 95% in the fiscal first quarter of 2019 to $1.66. Meanwhile, analysts see revenue in the quarter climbing by almost 49% over the same period a year ago to $2.883 billion. Those estimates have been steadily rising since the start of 2018, with earnings estimates previously at  $1.12, a jump of 48%, while revenue estimates have jumped by 17.5% from $2.454 billion.

(Ycharts)

Increasing Price Targets

The average price target on the stock has jumped by 16% since the start of the year to $250 from $215. But despite the optimism on the stock price, 41% of the 37 analysts covering the stock have a "hold" rating, and 8% have a "sell," rating, according to data from Ycharts—not a bullish endorsement. 

NVDA Price Target data by YCharts

Not Cheap

Shares of Nvidia do not come cheap either when considering the stocks in the sector. The average one-year forward PE ratio of the top 25 holdings in the iShares PHLX Semiconductor ETF (SOXX) is 15.1, with a median of 13.9. Nvidia is the most expensive stock in the group at 28 times 2020 earnings estimates of $7.87.

History on Its Side

Nvidia has a history of beating expectations, and the last quarter was just a recent example. Nvidia, in the fiscal fourth quarter of 2018, beat revenue estimates by more than 8.5%, while the earnings topped estimates by nearly 30%. (For more, see also: Nvidia's Breakout Seen Fueling 14% Stock Gain.)

There will be a lot of pressure on Nvidia when it reports results in the beginning of May to deliver a big beat. 

​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.