What Should You Do with Nvidia Stock? 3 Strategies for Right Now

Finance

"What to do about shares of Nvidia? I see daily in the comments, questions from investors of what to do. Some have massive profits and don’t know whether to sell, others are wondering if it’s too late and don’t want to get caught in a bubble. Trying to estimate a fair price target for shares of Nvidia, investors have to wonder if the company can keep up this breakneck speed. Nvidia more than doubled sales last year, grew revenue by 126% to $60.9 billion, a pace you have to think slows down …but management estimates a $1 trillion market opportunity in AI, autonomous and digitalization . A trillion dollars market revenue per year, that’s still a lot of runway for growth for a company dominating the market and still at $61 billion a year in sales.

In Morningstar data, we see shares of Nvidia have traded at a five-year average of almost 20-times sales and 69-times earnings. That’s very much below where they’re at now; a price-to-sales of 41-times and PE ratio of 76-times but also well above the low-points of 13-times sales and 60-times earnings over the last five years.

So if we apply the estimates for $3.61 earnings and $160 billion revenue to the average valuation multiples, we get an Nvidia price forecast between $130 a share (20X Revenue times $160 billion and divided by shares outstanding) and $249 each (69X PE times $3.61) for the end of next year. We could use the current valuations of 40X sales and 76X earnings for a range of $258 to $274 per share but with the slowing growth I think it’s safe to expect these valuation multiples will come down a little. At the low point, if we use the lowest PE and price-to-sales ratios over the last five years, we get Nvidia estimates between $84 which is 13-times the $160 billion sales and $216 per share or 60-times earnings. Most of these are slightly or well above the current price so as long as Nvidia keeps performing as expected, let alone beating expectations, then it should continue to produce returns.
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