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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.