Nvidia’s stock has encountered a temporary setback following its impressive earnings announcement. However, analysts at Melius Research believe that this pause in the stock’s upward momentum will be short-lived.
In premarket trading on Tuesday, Nvidia shares were down 0.2% at $481.37. Prior to the earnings release last week, the stock had reached above $500.
According to Melius analyst Ben Reitzes, who maintains a Buy rating and a target price of $750 on Nvidia, there is still significant potential for the stock to rise by over 50% from its current level. Reitzes draws a parallel between Nvidia’s recent fallback and the pattern observed with Apple after 2009, as its valuation contracted before the market fully acknowledged the value of its services revenue alongside its hardware sales.
“We believe Nvidia is on a much more compressed timeline when compared to Apple—and it is already demonstrating characteristics that would justify a sustainable multiple more in line with its Magnificent 7 peer group,” stated Reitzes in a research note.
Reitzes also pointed out that Nvidia shares are trading at relatively lower earnings-per-share multiples compared to peers such as Apple and Microsoft. The company’s shares are priced around 23 times the consensus forecast earnings for 2024 and 20 times for 2025.
Compressed Timeline Delivers Potential Upside
According to Melius Research analysts, Nvidia’s stock is expected to bounce back swiftly despite its recent dip. The company’s current valuation appears reminiscent of Apple’s experience following 2009, whereby its services revenue became increasingly recognized over time.
With a Buy rating and a target price of $750, the Melius analyst believes that Nvidia could potentially outperform expectations in the near future. Reitzes also proposes that the company’s valuation could align more closely with its esteemed peers, as evidenced by their “Magnificent 7” comparison.
Favorable Valuation Compared to Competitors
Nvidia’s stock is currently trading at a relatively affordable earnings-per-share multiple when compared to industry giants such as Apple and Microsoft. Reitzes emphasizes that the stock’s valuation is approximately 23 times the projected earnings for 2024 and 20 times for 2025.
It is evident that Nvidia’s stock holds considerable potential for growth, considering its more favorable pricing and anticipated market recognition of its services revenue. The company’s future outlook remains promising, with analysts predicting a resurgence that could surpass current expectations.
Nvidia’s Growth Potential in Artificial Intelligence
The market’s focus on Nvidia’s sustainable growth rate for its artificial intelligence chips suggests that it is discounting an expected peak in sales over the next calendar year. However, the company’s networking and software revenue is expected to demonstrate its growth and margin expansion potential.
Unlike Apple, where it may take years for investors to realize its potential, Nvidia’s prospects are believed to be more easily recognized. This perspective makes Reitzes one of the biggest bulls on Wall Street for Nvidia.
While most analysts have praised Nvidia’s recent results, there are still some reservations about its capacity for further gains. According to Dave Sekera, Chief U.S. Market Strategist at Morningstar, the recent sell-off of Nvidia’s stock could be attributed to the perception that the stock is fully valued. Morningstar’s fair value estimate for Nvidia stock stands at $480.
Although Nvidia’s strong results have instilled confidence in the company’s long-term prospects, including an anticipated increase in revenue from $27 billion in the latest fiscal year to $120 billion in fiscal 2028, the overall demand for AI processors remains uncertain.
In conclusion, Nvidia’s artificial intelligence chips hold significant growth potential, and while there might be some skepticism in the market, Reitzes remains optimistic about the company’s future trajectory.