Nvidia Stock Up 50% This Year, Can It Continue?

by Trefis Team
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Nvidia stock (NASDAQ: NVDA) had seen a significant drop this year – dropping by about 17%, from $236 at the end of 2019 to close to $196 on 16th March 2020, as growing fears around the coronavirus outbreak triggered a sell-off across global equity markets. But with the US government announcing a string of measures to keep businesses afloat, investor sentiment improved over recent weeks – helping NVDA stock to jump by 78% in the last two and a half months to reach $350 as the market opened on 5th June 2020. The current stock price is close to 50% higher than the level at the beginning of the year, and we believe that NVDA stock could see some downside as the world still awaits the sign of abatement of the pandemic. Our dashboard What Factors Drove 82.5% Change In NVIDIA Stock Between 2017 And Now? provides the key numbers behind our thinking.

Nvidia’s stock price increased between 2017 and 2019 from $192 to $235. The stock price increase between 2017 and 2019 was primarily driven by 12% growth in revenue between FY ’18 and FY ’20 (Nvidia’s fiscal year ends in January), and a 1.36x expansion in the PE multiple. The net income margin in fact dropped from 31.4% in FY ’18 to 25.6% in FY ’20. The sharp drop in profits in FY ’20 was due to  increased R&D expenses, as Nvidia ramped up its investment in the data center business. EPS dropped from $5.09 to $4.59 over this period.

The P/E multiple however, rose from 37.7x in 2017 to 51.2x in 2019 largely due to rising investor expectations, owing to the potential of the data center business. Further, the P/E ratio rose in 2020 and stands at over 75x currently. This rise in 2020 despite the impact of coronavirus, is explained below.

So what’s the likely trigger and timing to this downside?

With almost all major cities being locked down due to the spread of coronavirus, there has been a slowdown in economic and industrial activity. However, NVDA stock is up roughly 48% since January 31 after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. In comparison, during the same period, the S&P 500 index saw a decline of about 3.5%. The ongoing lock down of major cities and economic slowdown should at first look, hamper the company’s business. However, the current lockdown situation in many countries has led to a surge in gaming activities, which should aid Nvidia’s gaming processor revenue (which makes up over 45% of the company’s revenues). Thus, the lockdown could have a somewhat positive impact on the entire business of Nvidia.

Further, for Q1 2021 (quarter ending April 2020), NVDA saw a large 40% rise in revenues while net profit jumped around 2.3x year-on-year. The rise in revenue was mostly from the high-margin data center business, which came in at over $1 billion in quarterly revenues for the first time ($1.14 billion vs $634 million in Q1 ’20). Gaming revenue too, rose nearly 30% to $1.34 billion. Net income was largely driven by higher gross margins, owing to the data center business and lower R&D expenses (as a % of revenue). Regardless, Q1 only saw a partial impact of the current crisis. Nvidia’s Q2 ’21 results will likely not be as positive, as impulse purchases of gaming consoles could decline, impacting both revenues and profitability. If there are no signs of containment of the virus by the end of June 2020, NVDA stock could see a sharp drop to below $300 from its current level. Until then, it is unlikely that the stock will see significant upside and in the near term, NVDA stock could hover around $340 to $360 per share.

For more insights into how Covid-19 could impact Nvidia’s rival AMD, view our interactive dashboard Advanced Micro Devices Downside: How Low Can Advanced Micro Devices Stock Go?.

Our dashboard forecasting U.S. COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture.
The complete set of coronavirus impact and timing analyses is available here


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