Want a relatively cheap play on the artificial-intelligence frenzy? The answer might be right in front of you.
That’s the view of Bernstein analyst Stacy Rasgon, who asked whether Nvidia shares
NVDA,
which have surged this year, are actually an “AI budget buy.”
“It feels strange to complain about Nvidia’s stock performance given the shares are up an astonishing 231% [year to date], trouncing the market and peers as the lure of being the arms dealer to a potentially massive artificial intelligence surge beckons,” Rasgon wrote. “And yet, even that massive return in the stock has arguably been disappointing (and
the shares are actually down a bit over the last month following yet another enormous beat and raise).”
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He noted that “forward estimates have quadrupled this year as generative AI has boomed,” while “multiples have compressed by almost two thirds” in the same span.
Rasgon sees appeal in Nvidia’s valuation, with the stock trading at a mid-teens forward price-to-earnings multiple, which he says is its lowest valuation since the cryptocurrency implosion at the end of 2019. Shares also trade at a discount to the PHLX Semiconductor Index, he noted, something that hasn’t been the case since 2014.
“Today Nvidia is in fact the cheapest of the ‘AI narrative’ stocks out there,” Rasgon wrote, adding that “even Intel is more expensive!”
See also: Intel announces new PC, server chips designed for AI uses
He understands why there’s a bit of caution on Nvidia’s stock now, as estimates have risen so much and so quickly, fueling fears about how long Nvidia will be able to sustain its momentum.
“The sell side has next year’s [earnings per share] at ~$20, and we believe the buy side is likely closer to $25 (which actually seems eminently plausible!),” Rasgon wrote. “But investors seem worried that a $25 EPS could potentially be $15 the year after, and it is difficult to prove a negative (i.e. one cannot state that an air pocket will NOT happen).”
Yet he’s keeping the faith, noting that Nvidia executives are “rapidly refreshing their portfolio” with new architectures that should be able to support ever-higher prices.
“Other drivers (networking, software etc) abound,” he wrote, while “new business models leveraging AI are early, but starting to appear.”
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“We cannot say for sure that Nvidia will never encounter some sort of air pocket,” he added. “But we remain very bullish on the long-term opportunity in front of them.”
Rasgon has an outperform rating and $700 target price on Nvidia’s stock.
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