Shares of microchip designer Nvidia (NVDA -4.35%) are reaching fresh all-time highs daily. The stock has nearly doubled in 2019, gaining 84% since Christmas eve 2018. Will Nvidia's momentum carry over into 2020, or has the stock soared too high for its own good?
Let's find out.
The word on the Street
Your average analyst likes Nvidia today. The stock has garnered an average rating of 2.2 out of 5, where a score of 1 means "strong buy" and a score of 5 means "strong sell." Only 1.5% of Nvidia's stock is sold short at the moment, showing that investors on the open market largely agree. By contrast, rival graphics chip designer Advanced Micro Devices (AMD -4.71%) carries a slightly more negative analyst rating of 2.5, and 10% of the company's shares are sold short.
In our Motley Fool CAPS system, Nvidia holds a four-star rating out of five while AMD has to settle for three stars. In other words, thousands of investors just like you agree that Nvidia is a solid investment right now (and a significantly better pick than AMD).
Nvidia by the numbers
Revenues have been retreating in 2019, mostly due to the trade tensions between Washington and Beijing. A couple of other factors also weighed on Nvidia this year to a lesser degree, including lower interest in 2018's most popular games, Fortnite and PUBG, and continued weakness in the cryptocurrency industry. The introduction of a brand-new graphics core with support for real-time ray tracing wasn't able to counteract the combined force of these downtrends.
In the recently reported third quarter of fiscal year 2020, Nvidia saw sales slide 5% lower to $3.01 billion while adjusted earnings fell 3% to $1.78 per share. These results landed ahead of analyst projections, which had called for earnings near $1.57 per share on sales in the neighborhood of $2.91 billion.
At the same time, Nvidia's shares are indeed breaking new pricing records nearly every day, and the stock is trading at a lofty valuation of 60 times trailing earnings, 41 times free cash flows, and 15 times sales. These are valuation multiples typically reserved for skyrocketing growth stocks, not former growth phenoms stuck in a market lull.
What's next for Nvidia?
Clearly, both analysts and ordinary investors expect Nvidia to get back on track in 2020 and beyond. In the third-quarter earnings call, management provided some fuel for that unquenchable fire. Hyperscale customers are coming back to the order window with large purchase contracts for data center chips. Some of Nvidia's number-crunching products are helpful in the quest for better artificial intelligence systems, and others are a perfect fit for devices in the Internet of Things category. So Nvidia's executives expect these macro-trends to drive massive demand for the company's chips in the years ahead.
In that light, Nvidia's nosebleed valuation starts to make sense. The issues that slammed the brakes on this company's growth in 2019 should be short-lived, allowing Nvidia to get back on track in 2020. International trade relations can't stay sour forever, another generation of massively popular games will eventually replace the fading Fortnite trend, and cryptocurrency miners might even come back to buying Nvidia cards again.
I wouldn't call Nvidia a "screaming buy" under these circumstances, but the stock offers a greater promise of renewed growth than the risk of drastic declines from this point. You might want to buy in on a dip or simply buy in thirds rather than rush in with a large Nvidia order today. Either way, Nvidia looks like a solid buy despite stalled sales growth and a nosebleed valuation. That's a rare combination.