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What Is the Outlook for NVIDIA in 2022?
Stock Analysis & Ideas

What Is the Outlook for NVIDIA in 2022?

NVIDIA Corporation (NVDA) is a high-quality chip company, but that does not automatically guarantee strong future returns. Valuations have to be considered, and NVIDIA is historically expensive today.

Despite its solid growth and strong fundamentals, NVIDIA Corporation does not seem like a good buy at current prices, which is why I am neutral on the stock today. (See Analysts’ Top Stocks on TipRanks)

Near-Term Growth Outlook

NVIDIA has grown its business at an attractive pace in the last couple of years, on the back of strong graphics card demand by both gamers and crypto miners. At the same time, NVIDIA also grew its business in other spaces, such as data centers and autonomous driving technologies. Thanks to its strong tech, NVIDIA was able to gain market share in these key markets versus its peers.

However, the law of large numbers dictates that NVIDIA’s relative growth rate will inevitably decline in the future as the company gets bigger and matures. The analyst community also forecasts this decline in its relative growth rate.

Following a massive 60% revenue increase this year (NVIDIA’s current fiscal year ends in January 2022), analysts are predicting revenue growth in the mid-to-high-teens range for the next two years, which is well below the approximate 30% revenue growth rate of the last five years.

This growth deceleration can be explained by the fact that market growth rates, e.g., for graphic cards and data centers, are slowing down to some degree, compared to how quickly these markets grew in the past. The Metaverse could allow for a meaningful increase in NVIDIA’s addressable market in the long run.

Still, it seems doubtful that Metaverse spending by Meta Platforms (FB) and others will have an outsized impact in the near term, as the Metaverse is likely a technology that will take off several years from now. Metaverse spending will probably not substantially impact NVIDIA’s business growth rate in the current year and the next one or two years.

NVIDIA Is Expensive Right Here

Considering the slowing growth (albeit NVIDIA will still grow at a compelling pace of 15%-20% in the next two years), NVIDIA looks relatively pricy today. The company is valued at around 73x this year’s net profits.

In contrast, the long-term median earnings multiple for the stock is 51 – thus trading at a ~40% premium compared to its historical valuation, even though growth in the coming years will be lower than that of the last couple of years.

Likewise, when we look at NVIDIA’s forward enterprise value-to-EBITDA multiple (which accounts for changes in debt usage and a company’s cash position), the company still looks expensive. Shares are trading at 66x EBITDA today, whereas the five-year average EBITDA multiple is 37 – this means that NVIDIA trades at a massive 78% premium to its historic valuation today.

One can, of course, argue that NVIDIA’s valuation range in the past used to be too low and that the current valuation is more reflective of underlying value. However, I believe that it could be risky to assume that valuations have moved to a higher level and that they will permanently remain this high going forward.

Quality at Too-High of a Price

NVIDIA has strong technology, and it will continue to generate reliable business growth, although likely not at the rate seen in the last couple of years. NVIDIA also has a clean balance sheet, which helps reduce risks.

However, due to its pretty high valuation, NVIDIA does not look like an attractive investment today, I believe. Buying shares when a company is trading in line with historical valuations or at a discount seems more opportune than buying when shares are historically expensive.

Wall Street’s Take

Turning to Wall Street, Nvidia has a Strong Buy consensus rating, based on 22 Buys and two Holds assigned in the past three months. The average Nvidia price target of $358.36 implies 11% upside potential.

Disclosure: At the time of publication, Jonathan Weber did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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