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Why Nvidia Stock Popped Today

By Rich Smith – Aug 4, 2021 at 3:01PM

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Rosenblatt says Nvidia won't get to buy ARM Holdings -- but Nvidia is a buy itself regardless.

What happened

Shares of semiconductor manufacturer Nvidia (NVDA -0.78%) -- a supplier of chips for everything from playing video games to mining cryptocurrency to performing artificial intelligence tasks -- are posting a tidy 2.3% gain as of 2:25 p.m. EDT Wednesday.

And you can thank the friendly analysts at Rosenblatt Securities for that.

A glowing green ascending line on a stock chart.

Image source: Getty Images.

So what

In a note out this morning, Rosenblatt raised its price target on Nvidia stock 25% to $250 -- that's incidentally about 25% above where the stock trades today.

Rosenblatt cites Nvidia's earnings power on "best-in-class AI" and its opportunities in next generation networking and data processing as well as autonomous driving software, and apparently believes even the company's 94-times-earnings valuation currently is not too much to pay for Nvidia stock.

The analyst admits there's some pessimism surrounding Nvidia right now, based on a (well-founded) belief that U.K. antimonopoly regulators will prevent Nvidia from acquiring ARM Holdings from Softbank, as the company had planned. "Nonetheless," argues Rosenblatt, "the stock will work" because it has a "Plan B" to simply partner with ARM to produce supercomputing chips for a wide array of customers including Amazon, Marvell, and others.

And that's on top of the company's graphics and other semiconductor businesses.

Now what

Is Rosenblatt right about that? I'm honestly not certain.

On the one hand, Nvidia certainly seems to have all the momentum on its side in semiconducting right now (the ARM deal aside). On the other hand, the fact that the analyst feels compelled to look all the way out to fiscal 2024 to find a valuation it thinks it can justify on the stock -- paying $250 for a $6 earner works out to a 42-times-earnings valuation -- tells me that even Rosenblatt is a bit leery of the valuation on Nvidia stock.

With analysts on average predicting that Nvidia might grow earnings at 30% or 31% annually over the next five years, I think I might barely be able to justify paying 42 times earnings if that's what Nvidia cost today. But with the stock currently valued at more than twice that based on trailing earnings, I'm afraid Nvidia stock still just costs too much right now.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Nvidia. The Motley Fool recommends Marvell Technology Group and Softbank Group and recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

Stocks Mentioned

Nvidia Stock Quote
$167.44 (-0.78%) $-1.32
SoftBank Group Corp. Stock Quote
SoftBank Group Corp.
$22.15 (-1.72%) $0.39

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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