Nvidia, Inc. (NVDA), one of the top-performing stocks over the last year, up 251%, is continuing its run by breaking out of a range it has been trading in since August.
The break above the prior high of $505.44 occurred on January 8 when the price increased 6.43% on higher-than-average volume. The stock gained another 4.7% in the ensuing two days.
NVDA saw extraordinary earnings per share (EPS) growth of 268% in 2023 and analysts are projecting 103% average earnings growth per year over the next five years. That includes a 66% increase in the 2024.
While NVDA’s price has soared, some investors are worried about the high Price/Earnings ratio of 71.5. High P/E ratios can sometimes be a signal a stock is overvalued, but not always.
Cory Mitchell, an analyst with Trading.biz, points out that, “P/E values tend to be high in companies that are growing rapidly. That doesn’t necessarily mean it is overvalued. Investors are betting on future growth, not only the growth that occurred in the past, which P/E measures. Forward P/E takes into account future earnings, and it is 26.6 in NVDA.”
The P/E of the S&P 500 index is 26.
In 2023, the P/E of NVDA was as high as 258. The stock levelled off but has ultimately resumed its course higher. The P/E dropped to its current level not so much from the price declining but from earnings rising.
All stocks eventually have a large decline. More than 85% of North American stocks have had at least one 51% decline in the last five years. While NVDA may eventually have such a decline, currently the price is acting strongly.
Adding the height of the prior range to the breakout point, a conventional technical technique puts a price target at $610. The multi-month range was just over $100 with a breakout point of $505.44.
Another technique is to measure prior major upwaves or legs in the uptrend so far. These can help provide a sense of how far the current rally may run.
- Late 2022: 55% before the price experienced choppiness then a decline.
- Early 2023: 65% before the price experienced a choppy sideways period.
- March 2023: 22% before the price experienced another sideways period.
- May through July 2023: 40%+ until a series of several small pullbacks followed by small rallies.
A 22% rally off the recent January swing low puts a target near $580. A 50% to 60% rally puts a target between $710 and $760.
NVDA is currently strong, and for good reason. It is seeing exceptional earnings growth, and investors are betting that will continue.
A major risk is that it doesn’t; that NVDA earnings don’t meet the expectations of investors, that expectations begin to decline, or some other shock (or just selling) sends the stock lower.
Investors are encouraged to always use risk management which includes establishing a manageable position size for the amount of capital in the account and having an exit plan for whether the price rises or declines. This is important even in large seemingly “safe” companies like NVDA. Circumstances can change. It wasn’t that long ago when NVDA fell more than 65% from the 2021 high to the 2022 low before recovering with the current rally.
