The 4 Research Engines Driving the NVIDIA Cart

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NVIDIA Corp. (NASDAQ: NVDA) was a stock on fire in 2016, and its share price has continued to surge over 40% in 2017. The company is winning in graphics from entertainment, gaming, virtual reality and augmented reality. Artificial intelligence and machine learning also represent huge upside across many industries for NVIDIA. Analysts have chased their target prices higher and higher, but the stock has continued to outpace the optimism and four fresh research reports have created some influence in NVIDIA shares.

NVIDIA was given what would be three new street-high analyst target prices in less than 48 hours in this past week. Two are traditional sell-side brokerage analysts and one was outside of the traditional research realm. And one short selling report acted as a huge catalyst that helped to send NVIDIA shares lower on Friday.

To show just how much this has risen above analyst expectations: NVIDIA’s consensus analyst target price at the end of 2016 was closer to $100. The highest official analyst target in the Thomson Reuters sell-side universe was $168 ahead of these two analyst calls. Friday brought a different move in NVIDIA after Citron Research (the former Stock Lemon) said it’s time take big profits in NVIDIA.

24/7 Wall St. has featured parts of each call to show the good, bad and the indifferent regarding NVIDIA and its share price versus valuations. NVIDIA was also featured in a “Peaking Stock Market” feature on Saturday, showing the  risks and perils of overcrowded stocks even if the broad market can continue marching higher.

On Thursday, Citigroup gave NVIDIA a $180 price target, compared with a prior street-high analyst target of $168. The firm is calling for increased demand and sales from the data center business, higher sales from the automotive sector, and many expansion opportunities from cloud offerings. Citigroup also talked up video games and artificial intelligence. The firm also outlined the case that NVIDIA could rise even further.

Merrill Lynch also came out on Thursday reiterating its Buy rating and raising its own price objective to $185 from $155. This was after NVIDIA’s CFO presented at the BofAML Global Tech Conference on June 6. The firm sees strong upside to estimates in the second half of 2017 and in 2018 estimates with up to $7.00 in long-term earnings per share power. Merrill Lynch noted that NVIDIA’s valuation is justified by 10 times its growth opportunity and based on its leverage.

Argus, an independent research firm outside of traditional sell-side research, reiterated its Buy rating and raised its price target to $175 from $140 on Friday. Argus noted that NVIDIA’s strategy for monetizing its graphics processing know-how in multiple markets supports its fast-rising stock price. Argus said:

For any stock that has risen four-fold in a year, valuation must be carefully scrutinized. Valuation metrics are not getting too stretched, according to our analysis, because NVIDIA is growing revenue, earnings and cash flow much more rapidly than peers. The two-year forward PEG ratio on forecast FY18 and FY19 earnings is about 3.5-times, which we believe is deservedly higher than the 2.5 average for the peer group of Argus covered semiconductor companies. NVIDIA is also attractive on forward looking metrics such as discounted free cash flow valuation.

NVIDIA’s 2016 investor day had alerted a wide audience to its growing presence beyond PC gaming, but the 2017 investor day was more about executing in markets including virtual reality, machine learning, artificial intelligence, autonomous driving and the future of technologies in cities and life-sciences.

Citron Research said in its negative NVIDIA report, the view is that NVIDIA should trade back down to $130. The report said:

Six months ago when NVIDIA had a trading frenzy and was at $119 Citron predicted a quick fall back to $90…the stock soon his $95 and Citron called the cover… In the recent frenzy in NVIDIA shares, it has added more to its market cap than the total valuation of its competitor AMD. Now it is fueled by an irresponsibly bullish number from Citi. … Just seven months ago, their analyst team had a $90 price target. But yesterday, their target is doubled $180 … despite the weakness in NVIDIA’s core gaming business.

Whether it was a negative article or just an excuse for perhaps some overdue profit taking, the move in NVIDIA shares was big. After hitting a new all-time high of $168.50 on Friday, NVIDIA shares were down about 6.5% at $149.60 by Friday’s closing bell.

Perhaps another consideration is just how much volume traded on Friday. Its 91 million shares traded was about six times the normal daily trading volume.