Despite A High Valuation, Surging Demand Makes Nvidia Stock A Smart Bet

July 16th, 2021 by Trefis Team
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NVDA: NVIDIA logo
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NVIDIA

Having jumped nearly 4x from its low in March 2020, at the current price of $758 per share, we believe Nvidia stock (NASDAQ: NVDA) has further upside potential. Nvidia stock rose from $200 in March 2020 to $758 currently, much more than the S&P which increased by around 95% from its lows. Further, the stock is up around 2.5x from the level it was at before the pandemic. Despite that, we believe Nvidia stock could rise around 10% to regain its recent high of $835, driven by expectations of continuing demand growth and stellar Q1 2022 results. Our dashboard What Factors Drove 468% Change In Nvidia Stock Between 2018 And Now? has the underlying numbers behind our thinking.

Nvidia’s stock price rise since 2018-end came due to a 42% increase in revenue from $11.72 billion in FY 2019 to $16.68 billion on an LTM basis (Nvidia’s fiscal year ends in January). Despite a 2% rise in the outstanding share count over this period, RPS (revenue-per-share) jumped 40% from $19.30 in FY 2019 to $27.00 over the past 12 months.

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Meanwhile, Nvidia’s P/S (price-to-sales) multiple rose from 7x in 2018 to 29x currently, but we believe that the company’s P/S ratio has the potential to rise further in the near term on expectations of continuing demand growth and a favorable shareholder return policy, thus driving the stock price higher.

Where Is The Stock Headed?

The global spread of coronavirus and the resulting lockdowns have led to a rise in online activity and driven the shift toward working from home. This has led to a rise in demand for Nvidia’s GPU products from the computing and gaming segments, as well as from the data center segment. This is evident from Nvidia’s Q1 2022 earnings, where revenue jumped to $5.66 billion, up strongly from $3.08 billion in Q1 2021. While COGS rose at the same rate, the company was able to keep R&D and SG&A expenses in check, which led to operating income doubling to $1.96 billion. A marginal drop in the effective tax rate saw EPS jumping more than 2x to $3.08.

Further, we believe the company will continue seeing strong revenue growth in the medium term, as data center and GPU demand is expected to stay strong. Additionally, if Nvidia continues to successfully control operating expenses, profitability could rise further in the near to medium term. This will raise investor expectations, driving up the company’s P/S multiple. We believe that Nvidia stock can rise around 10% from current levels, to regain its recent high around $835.

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