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Can Nvidia’s Stock Price Charge Higher?

Tuesday, October 17th, 2017

Nvidia (NVDA) has experienced astronomical returns over the past few years. Had you bought the company at the beginning of 2016, you would have received a return of over 500%. While this is exciting, you cannot go back to purchase it and can only value the company based on the today’s fundamentals. Unfortunately, many investors make the mistake of looking at the stock price return and think that past success will continue. It is important to understand the stock price means nothing at all unless you understand the underlying business.

The company is currently involved in potentially high growth areas such as gaming, artificial intelligence, and self-driving. The company has also been a benefactor of crypto currencies. It would be important to understand where the company generates its sales and earnings and how each division contributes to the business. Without looking deeper at the company, it is hard to determine how much of the business comes from crypto currencies, but this does concern us. There has been much discussion over potential problems with crypto currencies moving forward.

Given the rise in the stock price, the lofty valuation ratios do not surprise us. The current Price/Earnings Ratio is 56.67, while the industry average is 28.08. Price/Sales of 14.23 is well above the industry average of 3.46. Price/Tangible Book value of 22.5 is also well above the industry average of 12.21. Price/Cash Flow of 47.94 is unfavorable compared to the industry average of 14.73. While the ratios do not surprise us, that does not mean they do not concern us. The ratios are extremely high which demonstrates they are pricing in very high growth expectations for the years to come.

Nvidia pays a miniscule dividend of just 0.28% and it uses just 13.25% of earnings to pay out that dividend. We would not be surprised to see that dividend increase given the low yield and payout ratio.

The stock price has sky rocketed due to the company’s growth rates. Sales have grown by 53.4% year over year versus the industry average of 17.1% and EPS has grown by 125.5% over the same time period compared to the industry average of 59.1%. These are both positives, as we like to see sales and EPS increase over time, especially if they are out pacing the industry average.

Turning to the balance sheet, a current ratio of 7.82 shows the company has a lot of liquidity. Investors should wonder why there is that much liquidity and how the company plans to generate shareholder value. Nvidia has Debt/Equity of just 34.7%, which is a positive, as we like to see companies with little debt.

Looking forward to January 2019 and using a forward multiple of 16.5 on estimated GAAP EPS of $3.93 gives us a target sell price of $64.85. This is well below the current price of $197.93. To justify this stock price and have a forward multiple of 16.5 the company would need to grow EPS to $12. That would mean the company would have to grow January 2019 estimated EPS by 205% over the coming years. This illustrates the type of growth estimates investors are placing on this company. While it has many positives, the valuations on this company should concern investors.

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