With nothing more than a quick glance at the headlines, one might conclude it’s just another case of the analyst community playing a game of “chicken,” with NVIDIA Corporation (NASDAQ:NVDA) serving as the proverbial guinea pig. The game? Who’s willing to set the highest target price for NVDA stock.
Cowen analyst Matthew Ramsay is the current leader of that contest, by the way, raising his target to $325 per share last week. That’s 33% above the current price — a lofty goal made even more amazing by the fact that NVDA shares had rallied 14% from April at the time Ramsey made the call. And it’s even more amazing still in light of the fact that Nvidia stock has gained more than 70% over the course of the past 12 months.
If we’re taking a real close look at Ramsey’s context and timeframe though, and comparing it to the company’s current earnings trajectory, it’s not that difficult of a target to digest.
What He Said About NVDA
Cowen upped the ante on Friday, publishing “Buy” ratings on NVDA as well as for rival Advanced Micro Devices, Inc. (NASDAQ:AMD) on the grounds that this sliver of the technology sector was best positioned to capitalize on the current hot buttons. Namely, autonomous vehicles, artificial intelligence and even data centers are all opportunities that could drive unexpectedly solid revenue for Nvidia.
Ramsey conceded, “Yes, it’s expensive,” acknowledging that the trailing price-to-earnings ratio of 40.5 and forward-looking P/E of 33.5 were both pushing the limits of palatability — even by technology stock standards. Ramsey added of the stock’s frothy valuation, however, “but it should be!”
It would be easy to disagree, in light of the competition that’s brewing from all directions. Aside from AMD, Intel Corporation (NASDAQ:INTC) is also now working on a home-grown graphics processing solution. Meanwhile, Alphabet Inc (NASDAQ:GOOGL)(NASDAQ:GOOG) — with the help of Intel — continues to tinker with self-driving car technology, and Tesla Inc (NASDAQ:TSLA) has teased with the idea of dropping Nvidia as the supplier of the “brain” for its self-driving platform. Never even mind that a whole slew of data-center owners are starting to toy with the idea of making their own chips from scratch.
The thing is, it looks like the analyst community has already factored in those competitive pressures. NVDA stock looks pretty good at Ramsey’s lofty target anyway.
The graphic below tells the tale, plotting past and projected annual revenue and per-share profits. Calendar 2020’s projected earnings? A modest $10.10 per share, up 28% from 2019’s expected $7.87, which is only about 8% better than 2018’s expected bottom line of $7.29 per share. In light of the buzz and the fact that Nvidia is the leader on several fronts, that’s actually a rather reserved outlook.
More important, even at Cowen’s target price of $325, a bottom line of $10.10 still only translates into a P/E of 32.2. That’s still rich, but not unusually rich for NVDA.
Oh yeah — Ramsey was also talking about 2022 numbers as much as he was talking about 2018 numbers. He never said the stock would get there overnight.
Bottom Line for NVDA Stock
And that perhaps is the double-edged sword of Cowen’s bold call. Most fans and followers of Nvidia stock have become accustomed to capitalizing on its short-term gyrations, and may now struggle to see it as the long-term play that Ramsey (probably) thinks it is. It can take guts to hold on during a short-term pullback, and it can take almost as much guts to not bail out at a short-term peak.
Cowen’s Ramsey is absolutely right, however, to expect big things from Nvidia down the road, despite the competition that will materialize along the way. It’s still the market leader on many fronts. There aren’t enough significant threats that could up-end its leadership before we get to 2020 and start to justify a target of $325 with the results on the radar for then.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
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