Nvidia shares have had an explosive 2019, gaining 66%. A low valuation to begin the year made the stock ripe for picking in hindsight, as data center revenue rebounded, and the company launched new gaming chips.
The gains may decelerate in 2020, but “my main comment on it is probably four to one investors looking for reasons to own it rather looking for reasons to sell it,” said Stacy Rasgon, analyst at Alliance Bernstein. But there still may be reasons to buy Nvidia for next year.
To be sure, 2019 is expected to see data center revenue contract 3% over 2018, with recent quarterly results showing the segment is on track to grow at a fast clip in 2020 and 2021. And as pricing is expected to rebound in most chip segments across the business, Nvidia’s gross margin is expected to expand to 63% next year, according to analysts polled by FactSet.
Now, Nvidia is trading at roughly 30 times next year’s earnings, which Rasgon thinks is likely fairly valued, but not more attractive than that. Earnings growth is expected to be 30% to 20% for the next two years, respectively. Analysts have an average next-12-months price target on the stock of $230, representing meager upside from the current $226 level.
Rasgon strikes a slightly tepid tone on the stock for the next year:
“It’s not that it [estimates] couldn’t be strong, but it better be strong. We’re now discovering that maybe this is not a business that just grows sequentially every quarter forever.”
For the longer term, he mentioned that growth may come through cyclical drivers less that secular ones. “It makes you wonder what multiple you want to put on it if you’re going to have cyclicality as well," Rasgon said. Nvidia does have a promising autonomous business, still in its early stages.