Trading Nation

After tripling in the past year, Nvidia has analysts throwing up their hands

Key Points
  • Nvidia shares Tuesday logged their 69th record high in a year's time.
  • Wall Street analysts are mystified by the stock's rapid growth.
Trading Nation: Nvidia's incredible rally
Trading Nation: Nvidia's incredible rally

Shares of Nvidia hit a fresh record high in early Tuesday trading, the 69th record high logged by the stock in a year's time. And with Nvidia stock now more than tripling in value over the past year, some analysts tasked with covering the stock are left scratching their heads.

"I have been making a valuation call on this stock for a long time (and clearly have been wrong)," Ruben Roy, MKM Partners analyst and managing director, wrote Monday in an email to CNBC.

Roy, who carries a neutral rating on Nvidia, has been calling the stock overvalued since the stock was trading at around $110, some $28 ago. After all, the stock is trading at more than 40 times forward earnings estimates.

Roy believes that the company's earnings growth will decelerate in the medium term, beginning in the second half of this year, as comparisons in the company's gaming segment (its largest revenue segment) become more difficult. Furthermore, Advanced Micro Devices, a competitor, could "at a minimum" create pricing pressure in the graphics processing unit as it prepares for the launch of a new product later this quarter.

"Investors are looking past intermediate term valuation and a thesis that earnings can be a lot higher down the road when new emerging markets, like data center acceleration, machine learning/artificial intelligence and autonomous driving really kick in," Roy wrote.

Portfolio manager Kevin Caron of Washington Crossing Advisors struck a similar tone.

"We don't own it, and we have trouble valuing it at these levels," Caron commented Monday on CNBC's "Power Lunch."

"This a very exciting business, in a sense, and I can see why there's momentum here. But whether you're talking about the graphics card business, or you're talking about the auto parts supply business, either one of these channels is very competitive," he said, adding that ultimately he cannot fathom what the company's valuation will come to be, and as a value investor he deems the stock "too rich at these levels."

Earlier this month, Nvidia surged more than 17 percent in the session following on the back of a quarterly earnings report that handily beat analysts' expectations.

The same week the company reported its earnings and posted that bump in share price, founder and CEO Jensen Huang spoke to a developer's conference in California, in an address that was widely discussed among investors. In his presentation Huang announced that Nvidia and Toyota would collaborate in the autonomous driving market.

The 24-year-old company's fundamental story is compelling to Matthew Ramsay, Canaccord Genuity analyst. Following strong earnings earlier this month, Ramsay raised his price target to $155 from $125. Such a target implies nearly 12 percent of upside from current levels. He reiterated his "buy" rating in a May 11th note to clients.

Ramsay described, specifically, optimism around the company's growth opportunity as highlighted by Huang and management.

"Our overall bullish thesis on [graphics processing unit] computing continues to accelerate (particularly data-center) and we believe NVIDIA's emergence as a platform computing company (of which gaming is just one important piece) is now cemented," he wrote.

In order to put numbers to his bullish call, Ramsay is forced to reach relatively far into the future: "Our $155 price target is based on shares trading at the average of roughly 25x our base case [fiscal] 2021 ([calendar] 2020) non-GAAP EPS of $5.50 and roughly 25x our bull case estimate of $7.00."

While 25 times earnings sounds like a reasonable multiple, an actual 25 times multiple on the earnings the analyst purports to expect (that is, the base case of $5.50) which would theoretically yield a $137.50 target. Ramsay is actually uses a blend of his base and bull cases as the basis of this multiple and the price target. When asked about this unusual methodology, Ramsay explained in an email to CNBC: "We've treated our more conservative base case as more of a bearish outcome given the fundamentals I see currently."

Ramsay further acknowledged that "we should clean up the vocabulary." But the fuzzy math might simply speak to the fact that forward earnings estimates just aren't too important for this stock.

At least Ramsay bothered to change his earnings numbers when he increased his price target. Following the stock's post-earnings surge, Mizuho analyst Vijay Rakesh raised his price target to $145 from $130 with "[n]o change to estimates."

"While NVDA's valuations are steep, we believe current [S]treet estimates are conservative, reflect licensing slowdown, so that improving PCs, gaming trends, VR, and datacenter position for upside to estimates," Rakesh wrote. "We have NVDA with a Buy-$145PT, ~42.6x F19E P/E, at the higher end of historical valuations."

This report was published a day after another report explained the prior price target: "We have NVDA with a Buy-$130PT, ~38.2x F19E P/E, at the higher end of its historical valuations."

The only thing that changed, then, is the analyst's expectation of how optimistic investors will be in the future.

Others say some that all of this talk of earnings is utterly beside the point.

The company is a "great example that there's no such thing as 'too far, too fast'," Ari Wald, Oppenheimer's head of technical analysis, wrote Monday in an email to CNBC. "It's been 'too far, too fast' for the last 200 percent of its rally."

It's a momentum stock, he said Monday on "Power Lunch," and the rules of momentum strategy are to let your "winners run."

He added that the breakout above $120 was notable, since the stock had previously been essentially trading in a sideways consolidation for much of this year, yet all above a rising 200-day moving average.

The stock was down 2 percent as of Tuesday afternoon.