Nvidia has lost nearly half of its market value since its peak, subsequently leaving many investors wondering whether the stock provides an attractive entry point. The U.S.-based technology firm seems under-appreciated by the bulk of market participants. Thus, I'm bullish on the stock; here's why.
Recent Performance ExplainedNvidia stock's recent weakness is multifactorial. First of all, the company faced a trying semiconductor supply-chain, which has added inflationary pressure to its business model. The semiconductor days to delivery ratio recently reached 26.6, meaning that Nvidia's operational efficiency is doubted by many investors.
Furthermore, Nvidia stock has faced stock market factor pressure, which has caused a significant drawdown in some of the big technology names as a consequence of a growth to value rotation, with inflation being the catalyst of it all.
Nonetheless, investors have likely overreacted to the various systemic and idiosyncratic headwinds, leaving Nvidia stock undervalued, and attractive.
Nvidia's Market OverviewA large part of Nvidia's recent success is tied to the rise in artificial intelligence's use cases for enterprise and gaming solutions.
GPUs are integral for artificial intelligence applications pertaining to image recognition. Thus, Nvidia's flagship A100 Tensor Core GPU has made significant strides over the past few years. Although the company's competitors, such as Advanced Micro Devices (AMD) and Intel (INTC), provide GPUs at competitive prices, Nvidia is often seen as the "best-in-class" GPU supplier, thus providing the firm with product differentiation advantages.
Furthermore, CPUs have grown in stature over the past decade as the proliferation of time-series methods has stimulated demand for the concept. Nvidia's GeForce RTX 3080 is considered a viable option for enterprise solutions, which is a key driver for the company.
Previous Earnings & What To ExpectThe firm's fourth-quarter earnings report produced an earnings-per-share amount of $1.32, translating to a 70.32% year-over-year increase. Looking forward, the company's first-quarter results will be released on May 25, in which a strong print is anticipated.
Additionally, Nvidia's Beneish M-score of -1.75 is reasonably placed, suggesting that there aren't any signs of aggressive financial reporting on an ex-post basis. Lastly, Nvidia has a reputation of beating earnings as it's done so for fifteen out of its previous sixteen reported periods.
Hedge Fund SentimentHedge funds are bullish on Nvidia stock. By observing TipRanks' 13-F tracker, it's clear that hedge funds have turned a corner on their Nvidia sentiment. After an abrupt sell-off during the earlier stages of the year, hedge fund managers added a cumulative of 1.3 million shares to their portfolios in the past quarter.
Notable names among the buyers include Ray Dalio, Charles Clough, and Cory Whitaker.
Hedge fund holdings provide a solid overview of a stock's near-term prospects, as they have short-term mandates that incorporate active trading to maximize their profits. Thus, Nvidia stock's prospects are considered lucrative among some of the Wall Street's whales.
Valuation Metrics & Price LevelNvidia's recent sell-off has dragged the stock back into undervalued territory. According to TipRanks' valuation algorithm, Nvidia's price-to-earnings ratio (40.89x) is in mid-territory, and its forward price-to-earnings ratio (32.20x) is at the lower end of the spectrum, suggesting that the stock might be undervalued.
Furthermore, Nvidia's PEG ratio of 0.39x suggests that the company's earnings-per-share growth is robust and undervalued by market participants.
Lastly, Nvidia's 1-year relative strength of 39.14 conveys that the stock is borderline oversold, meaning that it provides a lucrative entry point for investors who're willing to take on the risk.
Wall Street's TakeMorgan Stanley (MS) is one of the big Nvidia optimists on Wall Street. According to analyst Joseph Moore, "The stock is a core holding; our approach is to at least maintain a market weighting in the stock, and look for spots for an overweight."
Turning to the rest of Wall Street, Nvidia earns a Strong Buy consensus rating based on 20 Buy and 4 Hold ratings assigned in the past three months. The average NVDA stock price target of $315.23 implies 88.83% upside potential.
The Bottom LineNvidia's recent stock capitulation suggests that investors are worried about the general economy, which has led to a selloff of high-beta stocks, such as Nvidia. However, matters have been blown out of proportion, and market participants could realize that Nvidia is a robust company with "best-in-class" product offerings.
Furthermore, key metrics, hedge fund buying, and Wall Street's price targets suggest that Nvidia is an undervalued stock that currently provides a lucrative entry point.
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In less than week -- Wednesday, May 25 -- Nvidia (NVDA) is due to report its Q1 2022 earnings. Analysts on average are optimistic about the report itself, and also about the guidance Nvidia might give, predicting Nvidia will report 43% growth to $1.30 per share this quarter, and promise investors another 31% worth of growth ($1.36 per share) next quarter.
And one analyst thinks Nvidia could do even better than that.
Previewing next Wednesday's earnings report, Oppenheimer's Rick Schafer reiterated his Outperform (i.e. Buy) rating on Nvidia stock, even as he cut $50 off his 12-month price target and lowered it to $300. (To watch Schafer's track record, click here)
As the analyst explained, he sees "upside" to consensus forecasts over the next couple quarters. Not a lot of upside, however. Schafer actually thinks Nvidia might report only $1.29 per share next week, but predicts Nvidia's guidance for Q2 will call for $1.37 per share in earnings.
That's not the reason Schafer cut his price target, however. As the analyst explained, "group multiple compression" in the semiconductors sector means that investors are rewarding chipmakers lower stock prices for the profits they earn. That could be a problem limiting share price growth going forward. In the near term, however, Schafer still sees Nvidia stock as about 86% undervalued.
Why does Schafer think Nvidia stock is still going up?
Currently, Nvidia's business is dominated by, and about equally divided between two key areas -- data centers (including both those used for artificial intelligence and for cloud computing) and gaming. Sales of chips to data centers, which Schafer abbreviates simply "DC," comprise 43% of the company's revenues and are expected to show 10% sales growth in Q1. Gaming, which comprises 45% of the business, should grow as well, especially in Q3 later this year once Nvidia releases its promised "Ada Lovelace performance gaming GPU."
In short, Nvidia's two biggest businesses are humming along like proverbial well-oiled machines.
Now admittedly, this still leaves the valuation question to consider. In Schafer's estimation, Nvidia is on course to earn $5.51 per diluted share this year, and $6.56 per share next year. That works out to a current year P/E ratio of 31 on this stock, and a forward P/E of only 26. Neither of those valuations would be a concern, of course, if Nvidia was expected to keep growing earnings at 78% (as it's expected to this year). With earnings growth slowing down to just 19% next year, however, even a P/E ratio of 26 might be a bit too much to pay for Nvidia.
Worse, Schafer's estimates for free cash flow at Nvidia appear to be significantly behind reported net income. According to the analyst, Nvidia is generating about $0.28 in positive free cash flow for every $1 of revenue it takes in -- a "free cash flow margin" of 28%. That sounds good, but it works out to only about $9.5 billion in free cash flow this year for example -- resulting in a price-to-free cash flow ratio of 45 -- even higher than the company's P/E ratio.
At that price, it's actually a stretch to justify the $171 and change Nvidia stock costs today -- much less the $300 a share Schafer thinks it will cost a year from now.
Overall, Nvidia has a stellar reputation in the tech world, and has attracted no fewer than 25 ratings from Wall Street’s analysts. These include 20 Buys against 5 Holds, for a Strong Buy consensus view. NVDA has an average price target of $315.23, implying a 96% upside from the $160.7 trading price. (See NVDA stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.