Chipmaker Nvidia's (NVDA) stock is trading at all-time highs and recently surged on the back of stronger-than-expected earnings, but this stock is now probably overvalued if you weigh its growth prospects against its current price and compare it to Intel and Qualcomm.
Advanced Micro Devices shares have turned in the best performance among semiconductor stocks so far this year. They're up a blistering 207% in 2016.
Nvidia comes a close second, with year-to-date gains of 184%. The company now has a market capitalization of $50.33 billion and annual revenue of $6.14 billion (for the trailing 12 months).
Intel, with close to $58 billion in revenue (9.5 times Nvidia's), is at a market value of $166 billion (just over three times Nvidia's).
On the other hand, the $165.42 billion Qualcomm rakes in six times Nvidia's revenue. But then, every dollar brought in by Nvidia has received a multiple far greater than the big chip stocks.
Both Intel and Qualcomm have comparable profit margins to Nvidia. In fact, Qualcomm's is higher for the past 12 months.
Analysts are looking at a really bright future for Nvidia, however. Nvidia's artificial intelligence plays, automotive prospects, machine learning and opportunities in graphics virtualization in the data center space are attractive possibilities.
These positive growth prospects should translate into 24%-plus average annual earnings growth for the next five years. The industry is expected to have average annual growth of only 9.7% for the next five years, which makes Nvidia look like an unstoppable growth engine. On average, analysts expect only 10% average earnings growth from Intel over that period and 10.5% for Qualcoom.
So yes, Nvidia appears to have the better prospects for earnings growth. But even accounting for that growth, it may be a little pricey. Its price/earnings-to-growth ratio (based on estimates for the next five years is 1.59, higher than Intel's 1.33 and Qualcomm's 1.37.
Despite the stock's recent run-up, a number of analysts still give it a buy rating.
Nvidia's execution is exemplary and its unique transformation from a component supplier to a platform solutions leader is remarkable, but we fear that the recent run-up in the stock provides the company with zero margin for error.
It's unlikely the company will hit it out of the park every quarter, and any disappointment is likely to met with a selloff and a barrage of negative commentary.
The stock is already trading at $93.94. That's significantly higher than the $83.50 median 12-month target from analysts. That means that if you like this company's prospects, you should wait for dips in the stock's price.
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