Up 62% in 52 weeks, NVIDIA (NVDA 6.09%) is one of the hottest tech stocks on the market today -- but can it continue its winning streak?
That's the question that analysts were asking going into NVIDIA's investor day on Tuesday. Now here on Wednesday, several stock analysts have emerged on the other side to announce a series of new ratings and price targets on NVIDIA stock.
Here's what you need to know about them.
Thing No. 1: Jefferies lays out the facts (and the hopes)
StreetInsider.com contains a great write-up of the takeaways that investment banker Jefferies got out of the investor day. Chief among these: "NVDA is poised to be a de facto standard as [the technologies of Deep Learning, virtual reality, and self-driving cars] develop."
Jefferies was particularly impressed with NVIDIA's new Tesla P100 GPU, designed for "hyperscale" data centers run by cloud computing firms and expected to begin shipping mid-year, and also with its DGX1 "deep learning supercomputer, targeted at AI researchers, and powerful enough to "replace 250 servers."
Thing No. 2: Jefferies isn't the only one excited
Jefferies had already been optimistic about NVIDIA going into the conference, of course. Seeing its optimism confirmed, the analyst therefore just let stand its buy rating on NVIDIA stock, and its $42 price target. Other analysts, however, who had yet to be convinced of the stock's attractiveness, were won over as well.
As noted on TheFly.com, analysts at Roth Capital cited the long-term prospects of P100 and DGX1 as supporting their move to raise their target price for NVIDIA stock 15%, to $34.50. Canaccord Genuity went a few dollars farther, citing NVIDIA's continued dominance in gaming chips as contributing to a $41 target price. And Merrill Lynch went farther still, positing $43 for NVIDIA shares, and argued that NVIDIA is in the process of transforming itself "from a PC component company to a unique, hardware and software platform that will be leveraged across cloud computing, gaming, and auto markets."
Thing No. 3: Odd man out
And yet, not everyone is convinced. The sole holdout from this wave of enthusiasm over NVIDIA's prospects to become a titan of virtual reality, artificial intelligence, and self-driving car computing, it seems, is Stifel Nicolaus. Amidst all the cheering, Stifel pointed out this morning that it's not thrilled with NVIDIA's valuation here at $35 and change -- and downgraded the shares from buy to hold.
For investors, Stifel's reservations may be the most important news of all. After all, ranked in the top 10% of investors we track on Motley Fool CAPS, there aren't a whole lot of analysts who are smarter than Stifel Nicolaus. If Stifel says it's worried about the valuation at NVIDIA, well, that's a point worth looking into.
So let's do that.
The most important thing
Priced at 32.6 times earnings today, NVIDIA shares look pretty pricey. Even accounting for $3.6 billion in net cash, the stock sells for more than 25 times earnings, ex-cash, which is a steep valuation on a stock that S&P Global Market Intelligence has pegged for only 10% long-term earnings growth.
The free cash flow picture looks a bit prettier. Over the past year, NVIDIA generated nearly $1.1 billion in cash profits, which was nearly twice reported net income. The problem there, however, is that while analysts see a decent chance of NVIDIA growing GAAP earnings over the next several years, projections for free cash flow growth are basically nil. Indeed, according to S&P Global data, NVIDIA's free cash flow production is expected to fall short of 2016 levels in each of the next two years as capital spending rises, and cash generated from operations stagnates.
The upshot for investors
So where does all this leave us? Valued on free cash flow, NVIDIA stock looks slightly overpriced -- and likely to look even more overpriced as time goes on, and free cash flow shrinks. Valued on GAAP earnings, meanwhile, the stock is already looking mighty expensive. I have to side with Stifel Nicolaus on this one. Despite all the whiz-bang high-tech electronic wizardry coming out of NVIDIA's labs these days, the stock price just doesn't argue in favor of buying NVIDIA shares today.