Despite Its Rich Valuation, This Stock is Still a Buy

It’s been a mixed year for the broad market, but that has not been the case with Nvidia (NASDAQ:NVDA) stock. Thanks to excitement about growing adoption of generative artificial intelligence, investors have bid it up more than 80%, since the first trading day of 2023.

The chip maker benefits directly from this trend, as it means increased demand for its high-performance data center GPUs. Still, a growing number of investors are hesitant to enter/add to a position in NVDA right now, on valuation grounds.

At current price levels, NVDA trades for around 59 times estimated earnings for this fiscal year (ending January 2024). To the value conscious, this is pricey, especially as uncertainty about the tech slowdown still looms.

However, that does not mean that this stock, while hot to the touch, is not too hot to touch.

Priced for Perfection?
If one were to sum up the current bear case for Nvidia, “priced for perfection” would be an apt phrase. Those bearish on the stock believe that, with the big jump in price since January, the bona fide upside from the rise of A.I. is already accounted for.

Demand for chips among Nvidia’s other key end user groups continues to be weak, because of the tech slowdown. Skeptical investors believe the company will disappoint in the next few quarters and cause a severe NVDA stock correction.

But while on the surface, this argument may seem sound and substantive, it may be ultimately a flawed thesis. For starters, it’s not as if it’s going to be awhile before the impact of the rise of generative A.I. starts getting reflected in Nvidia’s top and bottom lines.

As seen in the company’s latest quarterly earnings report, A.I.-related demand has already bolstered its fiscal performance. In addition, as several sell-side analysts have argued, growth in A.I. spending over the next few quarters could outweigh the further impact of a tech slowdown.

Plenty More Runway
Considering the prospect of additional A.I.-related growth in the near-term, NVDA stock may avoid a correction, as the chip giant continues reporting better-than-expected results, and thus hold steady.

But even if you agree with me that such a scenario has a strong chance of playing out, you may still question whether shares have more room to move higher from here. You may instead believe NVDA’s next big move won’t happen for quite some time. Yet while I wouldn’t bank on shares spiking soon, another big move higher could play out later this year.

Here’s how it may happen. For this fiscal year, Nvidia may only beat analyst consensus for earnings in this fiscal year ($4.49 per share). Beating the top-end of sell-side forecasts (over $5 per share) may at best be a stretch goal.

However, if more signs emerge that the tech slowdown will end by the next fiscal year (ending January 2025), this could point to an increased likelihood that NVDA is back on track to hit much higher rates (above 30%) of earnings growth for an extended period.

Bottom Line
It’s not wishful thinking to believe that Nvidia has more room to run. Improvements in overall tech demand, coupled with a continuation of the A.I. trend, could drive a move to much higher prices.

The stock may have room to climb back above $300 per share. Re-hitting its all-time closing high ($333.36 per share) may also be within reach. That would represent a more than 27% move higher. Over a longer timeframe, shares could reach new highs, if the company re-enters a period of rapid growth.

Sure, additional rounds of moderate, temporary weakness could emerge, but anticipating these is easier said-than-done. If you are confident in the bull case, accumulating a position today may be your best course of action.

In short, don’t let worries about a premium valuation keep you away from NVDA stock.

— Thomas Niel

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Source: Investor Place