Are NVIDIA shares still on fire?

After a 76% increase in 2019, the shares of NVIDIA Corporation (NASDAQ 🙂 are on fire again. The stock has already increased 11% in 2020, helped by the renewed optimism of analysts about a rebound in demand for chips.

NVIDIA belongs to the group of top shares in semiconductors that defied extreme negative pressure because their fundamentals deteriorate at the end of 2018. It rose around 4% to $ 262.97 yesterday. As there are signs of a strong recovery in the demand for chips used in smartphones and data centers, the main question for investors is how far chip stock shares can go, especially if they trade at the highest price-to-future profit multiplies in almost a decade.

NVIDIA Weekly price chart

Most analysts expect chipmaker activities to improve in 2020 when they are expected to receive a significant boost from the introduction of 5G technology and the expansion of cloud infrastructure spending. But valuations are a major cause for concern, especially when taking into account risks such as the corona virus that is currently destroying the Chinese economy. NVIDIA has invested heavily in the second largest economy in the world, where many of its chips are used for assembly in other products, particularly in industries related to artificial intelligence.

To maintain upward momentum, chip producers, including NVIDIA, should publish better-than-expected financial results, according to Morgan Stanley analyst Joseph Moore, who was one of the first analysts on Wall Street to be cautious in the group in the second half of 2018.

The biggest test for NVIDIA investors is to find out if the equity rally is sustainable, Thursday after the US market closes, when the chip maker reports its fourth quarter. Analysts expect earnings per share of $ 1.66 per share, as earnings are likely to rise by around 34% to $ 2.96 billion compared to the same period a year ago.

"We expect a strong quarter and outlook in both gaming and data center, with perhaps some marginal conservatism in the gaming outlook driven by coronavirus," Moore wrote in a note on Monday.

"We expect a strong quarter and outlook in both segments, with multiple data points indicating strong demand from the cloud, as well as a fairly strong demand (and lean inventory conditions) for advanced game cards."

Missed the boat?

Despite his optimism, Moore did not raise the price target on NVIDIA, leaving it at $ 259 per share, but said he potentially sees "upside if numbers can get higher."

Unlike the somewhat warning note from Morgan Stanley, analysts at RBC Capital Markets are rather optimistic about NVIDIA's prospects for higher sales from data center customers. Indeed, analyst Mitch Steves has raised his share price target to $ 301, which represents a 17% increase from yesterday's share.

"We are increasing our NVDA estimates because we think the January quarter is slightly ahead of the high-end of guidance due to better-than-expected demand for gaming and data centers," Steves wrote in a note.

After seeing the strong increase in the share, the biggest question that investors are lurking is whether they have already missed the boat: is it now too late to buy NVIDIA shares?

On a comparable basis, it is not cheap. The price-earnings ratio of the share is 65.35 compared to that of Intel (NASDAQ 🙂 13.94. And with a gain of 35.7 times over time, NVIDIA is now also one of the most valued chip shares, reaching more than twice the average multiple of the semiconductor group.

Bottom Line

A broad recovery in semiconductor stocks suggests that investors feel more comfortable holding these shares. We continue to recommend a cautious approach to chip shares, as their earnings are still weak. NVIDIA, after a powerful rally last year, is prone to some correction before it goes higher. The profit report on Thursday can help to remove some uncertainty.

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