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Nvidia Stock Is On Fire: Is It Too Late To Buy?

The current year has been quite challenging for some of the world’s largest chip producers. Souring sentiment toward an industry that's suffering from production constraints pushed investors to sell chip stocks during the past three months.

The benchmark Philadelphia Semiconductor Index has hardly budged during the past three months as the selling pressure intensified. Hedge funds, for example, have been selling chip stocks all year, cutting their exposure to their lowest level since early 2020, prime broker data compiled by Morgan Stanley showed last month.

But the story for Nvidia Corp. (NASDAQ:NVDA) is different. The largest U.S. semiconductor-maker by market value continues to defy this negative pressure. Its stock has gained more than 20% in the past three months, massively outperforming the benchmark index. 

Nvidia Weekly Chart.
Nvidia Weekly Chart.

The shares closed Wednesday at $671.38, after gaining 3.2%, hitting another record high. That impressive run comes after 91% gains of the past year. How far this rally will go is anybody’s guess, but the company’s recent commentary shows that demand for chips used in gaming PCs, data centers and cryptocurrency mining, will remain strong in the second half of the year.

Revenue in the current quarter will be about $6.3 billion, plus or minus 2%, officials with the California-based company said last week, well ahead of analysts’ consensus estimates.

This bullish forecast came after the company produced very strong first-quarter earnings, again much ahead of analysts’ concurring estimates. Sales in Q1 surged 84% to $5.66 billion and profit, excluding certain costs, was $3.66 a share in the period, which ended May 2. 

Nvidia reported data center chip sales rose 79% to $2.05 billion in the fiscal first quarter from a year earlier. Revenue from gaming doubled to $2.76 billion in the quarter.

Crypto Boost

Having watched the stock's powerful rise, the biggest question lurking in the minds of investors is whether they have already missed the boat: Is it too late now to buy Nvidia shares?

On a comparable basis, it doesn’t come cheap. The stock's price-to-earnings ratio is 79 compared with 34 for Advanced Micro Devices (NASDAQ:AMD). And at 39 times forward earnings, Nvidia is also now one of the most richly valued chip stocks, fetching more than twice the semiconductor group’s average multiple.

A key factor that could fuel more gains in Nvidia stock is the company’s exposure to crypto mining, which is thriving these days as demand for digital assets surge globally. The company expects to make $400 million in sales in Q2 from cryptocurrency miners.

More than half the analysts that cover Nvidia boosted their price targets in reaction to the Q1 report, impressed by the company’s strong growth momentum and the steps it took to avoid a possible glut in the market if crypto demand proves short term.   

Bank of America analyst Vivek Arya said in a note to clients that Q1 results warranted a hike in his estimates and price target for the company, saying that splitting up the crypto and gaming products should help solidify the overall business. Bank of America, which has a buy rating on Nvidia, hiked its price target on the stock to $750 per share from $700. 

Bottom Line

The ongoing strength in Nvidia suggests that the stock is on pace to again outperform its peers as demand from data centers, gamers and crypto mining remain strong. These catalysts make its stock one of the safest bets in the chip sector, which remains volatile amid supply constraints.