NVIDIA Corporation (NVDA) traded below $115 in October of 2022. The stock closed at $1,139.01 on May 28, a nearly 10-fold increase in about 20 months.
The stock continues to rally, up 20% since the eve of May 22 when the company beat earnings expectations.
Analysts expected $5.60 in profit per share for the quarter and posted standardized earnings of $5.98. They also beat revenue estimates by nearly 6%.
The question remains, is the stock too expensive?
Cory Mitchell, an analyst with Trading.biz commented “NVDA has had a meteoric run, but it is driven by exceptionally strong earnings growth. It isn’t just hype.
The Price/Earnings ratio seems high at 66.5 but that could be justified based on expected future earnings. Analysts project $35.08 in profit per share next year. That is a Forward P/E near 30. The Forward P/E for the S&P 500 index is just over 21, but NVDA is projected to grow earnings by an average of 43% per year over the next five years, while the average S&P 500 is projected to grow by 9.5% per year.
Investors are willing to pay a higher price now to take advantage of that kind of growth. The stock will have ups and downs, but as long as it keeps strongly growing earnings, it is a good one to own.”
Fundamentally, here are some key statistics on Nvidia that help explain its strong stock price rise, and why investors are still buying.
- 55.2% average yearly earnings growth over the last five years. The median growth rate of S&P 500 stocks is 8.7% over that same time frame.
- 43% yearly EPS growth expected over the next five years, versus a 9.5% median yearly growth estimate for S&P 500 stocks.
- An “A” financial health rating from Morningstar. The most financially solid rating a company can receive.
- Forward P/E of 32.5, which is higher than the S&P 500 Forward P/E of 21, but NVDA is growing four to five times as fast as the typical S&P 500 stocks.
- Sales have increased an average of 47% per year over the last three years.
- The stock is up more than 3,000% over the last five years.
Technically, the stock has been in an uptrend since the October 20202 bottom. There were three pullbacks, between 22% and 26%, during the rally.
The first rally went 74% before pulling back 26% in late 2022. The next rally ran 262% before pulling back 22%. This was followed by a 148% rally and 22% pullback which bottomed in April. The stock is currently up 52% since the last swing low in April.
History never repeats exactly, but looking at how the price has moved in the past can provide insight into possible trading opportunities and also alert investors when things are changing, such as the stock price slowing down, or accelerating to the upside or downside.
Even with well-performing stocks, there is no certainty the run will continue. Limit risk by picking an entry point and then setting a stop loss that caps the loss if the price doesn’t move up as expected. Be aware of position size, so if a loss does occur the damage is contained to a small percentage of the entire account.
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