It’s been a rocky few months for shares of NVIDIA (NASDAQ:NVDA) since they hit an all-time high last November. They got caught up in the general market weakness at the start of the year as investors’ sentiment swung to risk-off.
Then rising inflation prints and higher interest rates, coupled with the Russian invasion of Ukraine took off even more shine from one of last year’s best-looking growth stocks.
But despite a 25% drop so far this month, there are a few reasons to think that now might actually be a good time to start picking up some shares of NVIDIA.
For starters, the recent bout of selling has opened up the risk-reward profile and created a potentially solid buying opportunity. This was the thinking from New Street Research at least who upgraded their rating on the stock from Neutral to Buy on Wednesday.
Analyst Pierre Ferragu pointed out NVIDIA’s attractive valuation and the likelihood of a strong outlook for its datacenter business. In addition, he feels the decline in cryptocurrency prices is no longer a reason to avoid the stock, writing in a note to clients that "any weakness driven by crypto would be limited, short-lived, and only an opportunity to add to positions."
His $280 price target, upped from $250, makes for compelling reading in light of where shares closed Wednesday night. At just over $220 a share, Ferragu is calling for an upside of about 30% from current prices.
In addition, Ferragu also highlighted the possibility that NVIDIA “continues to see strength in its datacenter business” as well as the fact that it's trading at 36 times 2025 estimates of $7.80 per share and just 2.2 times the Philadelphia Semiconductor Index.
Bullish Comments
The bullish outlook echoed similar comments from Bank of America the previous day, who noted that “shares have sold off recently on concerns over slowing growth, but that appears to be overdone.”
Bank of America analyst Vivek Arya maintained his Buy rating as well as his $375 price target. Considering shares tapped out last year at an all time high of $345, the 70% upside suggested here should be enough to tempt in even the more risk-averse investor.
Arya added in a note that "we continue to see NVIDIA as one of the most important growth companies in semis, perhaps in tech given its ability to grow sales in high entry-barrier computing markets at a 20-25% CAGR (3x semis industry growth), while maintaining industry leading 45%+ EBIT [margins]."
These new voices in the bull camp would have been much appreciated by the NVIDIA faithful, especially as in light of the downgrade that hit shares at the start of the week.
You don’t often see some of the more well known sell-side names take opposite positions at the same time, but that’s what happened when the team over at Baird downgraded NVIDIA on Monday.
Concerns around order cancellations and slowing PC growth were behind their decision to move the stock to a Neutral rating, with a trimmed price target of $225 suggesting shares might be trading at about fair value where they are now.
Getting Involved
Baird analyst Tristan Gerra isn’t a fully-fledged bear yet though, and he acknowledged that data center trends are still "very strong." At the same time, however, it's likely that a peak in year-over-year revenue will come in the first half of 2022 and gaming-related revenue is likely to be weak for the rest of the year.
It remains to be seen how the stock will perform throughout the rest of 2022, but on the balance there appears to be more things going in its favor than against it.
In addition to the fundamental strength mentioned above, the technical argument is quite strong too. At time of writing, NVIDIA shares have fallen back to a much-tested line of support at $215, a level where they’ve found buyers several times this year already.
If they can muster another defense of that level next week, then you have to be thinking they’ll turn north once again. Having failed to break them down once more, the bears could well decide to throw in the towel and the 30% and even 70% upside that the bulls are arguing for could well be realized.
