Since January 2023, Nvidia (NVDA 1.21%) and Robinhood Markets (HOOD 3.67%) have posted monster returns of 1,170% and 875%, respectively. Yet most Wall Street analysts believe the stocks remain deeply undervalued at current prices.
- Among 74 analysts, Nvidia has a median target price of $261 per share. That implies 43% upside from the current share price of $182.
- Among 28 analysts, Robinhood has a median target price of $123 per share. That implies 62% upside from the current share price of $76.
Here's what investors need to know.
Image source: Getty Images.
Nvidia: 43% upside implied by the median target price
Nvidia is best known for its graphics processing units (GPUs), but the company's greatest strength lies in vertical integration. Brian Colello at Morningstar writes, "Nvidia has a wide economic moat, thanks to its leadership in graphics processing units, hardware, software, and networking tools" needed to support artificial intelligence (AI) workloads.
Nvidia reported exceptional financial results in the fourth quarter. Revenue climbed 73% to $68 billion, driven by strong data center sales growth in the compute (58%) and networking (263%) segments. Gross margin expanded 1.7 percentage points, a sign the company has not lost pricing power despite competition from every angle. And non-GAAP (generally accepted accounting principles) earnings rose 82% to $1.62 per diluted share.
Somewhat surprisingly, Nvidia shares dropped more than 5% following the report. Factors contributing to the decline include concerns about revenue concentration (i.e., about half of total revenue comes from a relatively small number of hyperscalers) and the prospect of soaring memory prices, which could cut into margins in the future. But Nvidia expects revenue growth to accelerate in the first quarter while margins remain steady.
The market is missing the big picture: AI will be the most transformative technology of the next few decades. Nvidia dominates the AI infrastructure market, and the company is likely to maintain its dominance because it develops turnkey solutions that span hardware, software, and services. Wall Street estimates Nvidia's adjusted earnings will increase at 49% annually over the next two years. That makes its current valuation of 39 times earnings look downright cheap.
NASDAQ: NVDA
Key Data Points
Robinhood Markets: 62% upside implied by the median target price
Robinhood operates an online trading platform designed for younger investors. With nearly twice the number of millennial and Gen Z accounts as its closest competitor, the company is well positioned for growth as the population matures. Millennials and Gen Z are forecast to inherit more than $100 trillion in assets from baby boomers in coming decades.
Indeed, Robinhood is already gaining share in most brokerage service categories, including cryptocurrency, equities, margin lending, and options. Also, the company has rapidly gained share in prediction markets, its fastest-growing product line by revenue. Until recently, Robinhood partnered with prediction exchanges like Kalshi, but it has since acquired its own exchange.
Last year, Robinhood announced a suite of AI features called Cortex. So far, the company has introduced Cortex Digests, personalized portfolio insights generated by synthesizing breaking news, analyst ratings, and market research. Robinhood will add new features in the weeks ahead, including Cortex Assistant. CEO Vlad Tenev says the product "could be transformative."
Cortex is one of several features exclusive to Robinhood Gold, a membership program that costs $5 per month or $50 per year. Other perks include the Robinhood Gold credit card, cheaper options fees, and a higher yield on uninvested cash. Annualized Gold subscription revenue increased 56% to $200 million in the fourth quarter.
Robinhood stock is down 48% from its high, primarily because crypto transaction volume and monthly active users fell in the fourth quarter. But total platform assets increased 67% as users engaged more often with equities, options contracts, and predictions markets.
I think the pullback creates a buying opportunity. The current valuation of 38 times earnings is not cheap, but it is reasonable for a company whose earnings are projected to increase at 20% annually through 2027.
