Nvidia NVDA has remained one of the hottest stocks on Wall Street recently, plowing through market-wide volatility to post year-to-date gains of nearly 35% and almost singlehandedly extending the tech sector’s strong run.
The high-end chipmaker continues to see rising demand from its traditional gaming business, while its exciting growth markets—including datacenters, self-driving cars, and cryptocurrency mining—have proven to be valuable expansion catalysts.
Another remarkable thing about Nvidia’s recent success has been the firm’s ability to blow past expectations—which, in turn, has helped its stock move higher and higher. Investors that have been sitting on the sidelines might feel that they have missed their chance to profit from NVDA, but this red-hot stock has always shown a staggering ability to make fresh highs.
There are a number of reasons why an investor might still be bullish on NVDA; however, one of the best signs that Nvidia could be in store for further gains is the fact that it is currently sporting a Zacks Rank #1 (Strong Buy).
The Zacks Rank system harnesses the power of earnings estimate revisions, which have been shown to be directly correlated with near-term stock performance. Estimate revisions tend to reflect the evolving nature of business trends, and positive revisions usually reflect analyst optimism about a company’s outlook and profitability.
In other words, one of the simplest ways to determine whether a stock is poised to move higher in the coming weeks is to study its latest earnings estimate revision trends. Likewise, Nvidia is sporting a #1 (Strong Buy) designation because it has seen some of the strongest estimate revisions on the market.
One way to gauge the strength of a stock’s revision trend is to track analyst agreement, or compare the number of positive estimate revisions and negative estimate revisions a particular company has witnessed within a specific timeframe.
Over the past 60 days, Nvidia has seen 12 positive revisions to its full-year EPS estimates, with no negative revisions coming in that time. There have also been 12 positive revisions to Nvidia’s next-year EPS estimates—and again, no negative revisions for that period have been made in the past 60 days.
Another important factor here is magnitude, or the degree to which these estimate revisions are having an effect on consensus projections. Nvidia has also displayed some remarkable trends here.
In the same two-month period mentioned above, the Zacks Consensus Estimate for Nvidia’s full-year earnings has gained 88 cents, or nearly 12.5%. For the next fiscal year, the Zacks Consensus Estimate has added 50 cents, or 6.3%, in that time.
Obviously there are number of other factors that influence share prices on a short- and long-term basis. For example, certain investors might weigh growth more heavily and would notice that Nvidia is now expected to improve its earnings by more than 61% in the current fiscal year.
Other tend to focus on a handful of key valuation metrics and might conclude that NVDA is actually a bit overvalued right now. Indeed, a Forward P/E of nearly 33 and a PEG of 3.2 do reflect a stretched valuation to some extent.
Still, we believe that the strength of Nvidia’s revision trend adds even more to the story. It is a great sign for the company if an analyst admits that its previous expectation was not satisfactory—that his or her earlier assumptions were proved wrong by Nvidia’s outperformance.
Of course, outside factors pulling on the entire market can stunt this potential, and sudden changes to industry trends affecting Nvidia will obviously have negative consequences. But right now, Nvidia’s earnings estimate trends should make investors feel relatively bullish.
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