Shares of Nvidia (NASDAQ:NVDA) have traded sideways as of late. Since my last article on the chip maker, NVDA stock has fallen from an open of $165.50 on July 2 to $156.05 share on August 13 then losing another $6 in yesterday’s carnage .
So, with earnings due out today, is it time to buy NVDA stock?
Not so fast! While the company has positive growth catalysts in the pipeline, the shares could be overvalued. NVDA stock trades at a discount to competitor Advanced Micro Devices (NASDAQ:AMD). But high expectations continue to be priced into Nvidia stock. With shares continuing to trade at a premium to broad line chip makers, now may not be the best time to buy into this one. Here’s why I recommend some patience before making a move.
What’s Going on at NVDA?
With NVDA stock, several factors come into play. Among them are the U.S.-China trade war and the global chip glut. But the biggest factor is the GPU war with AMD. Last month, Nvidia launched the RTX line to compete with AMD’s family of Navi GPUs.
Both chip makers are competing for dominance of the gaming market. Part of the battle is based on performance. But price has been the primary factor in the war. AMD may have gotten the better of Nvidia on price. After pushing Nvidia to cut prices, AMD caught them off guard again — with another price reduction.
This price war underscores Nvidia’s troubles in the gaming space. But what future catalysts will be a shot in the arm for the Nvidia stock price? Perhaps cloud gaming is the ticket to future growth. Nvidia’s GeForce NOW enables PC gamers to stream more than 500 games from anywhere, using Nvidia’s GPUs remotely. The service is currently in beta, but a million-plus players have signed up for the wait list. The subscription-based service could be a cash cow for Nvidia. But cloud gaming remains a work in progress. Widespread availability of 5G is required before cloud gaming reaches critical mass.
Nvidia’s other businesses face headwinds as well. Last quarter, the company projected continued weak sales for the data center segment. The analyst community also believes that the data center business has yet to turnaround. But if the company can beat expectations and provide an improved forecast, investors could see a boost in the Nvidia stock price.
Much of this risk could already be factored into the Nvidia stock price. But this does not necessarily mean NVDA is undervalued. With this in mind, let’s take a look at Nvidia stock’s current valuation.
Nvidia Stock is Not Cheap
Nvidia stock continues to trade at a discount to AMD shares. NVDA currently trades at a forward price/earnings (forward P/E) ratio of 38, compared to AMD’s 69.5 forward P/E. In terms of enterprise value/EBITDA (EV/EBITDA), NVDA trades at an EV/EBITDA ratio of 28.4, compared to AMD’s EV/EBITDA ratio of 69.7.
While NVDA trades at a lower valuation than AMD, I continue to believe that Nvidia stock is not cheap. NVDA trades at premium to broad line chip makers such as Intel (NASDAQ:INTC), which currently trades at a forward P/E of 11.5 and has an EV/EBITDA ratio of 7. Another broad line chip maker, Broadcom (NASDAQ:AVGO), trades at a forward P/E of 50.3, but at a lower EV/EBITDA ratio (14.2) than Nvidia. With the company’s growth troubles, it is tough to justify the stock’s current premium to the broad line chip names. NVDA may be a strong opportunity down the road, but not at the current price.
Bernstein analyst Stacy Rasgon agrees. Rasgon recently gave the stock a “market perform” rating, believing the shares’ current valuation minimized potential upside. As he wrote in his client note, “We remain somewhat cautious into the print nonetheless, and believe better entry points may exist at later dates.”
Rasgon’s price target is $150 a share. I believe NVDA stock could go materially lower. If NVDA continues to disappoint, shares could trade closer to the valuations of the broad line chip makers.
Bottom Line on NVDA Stock
Investors have beaten down NVDA stock but they’re not yet at bargain levels. While the company’s valuation is below arch rival AMD, Nvidia stock continues to trade at a fairly high valuation. More bad news could hit the price and present a stronger buying opportunity. But it could also be a warning sign to avoid the stock further. Take your time with NVDA. Wait until a better entry point, then make your move.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
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