This is the first time in seven years that Nvidia Corp. (NVDA, Financial)'s price-earnings multiple is lower than the S&P 500's. To get there its stock had to drop 55% in the last quarter alone, falling all the way from $289 a share, leaving plenty of analysts shaking their heads.
Bank of America Merrill Lynch put a "buy" rating on the stock in late October with a price target of $300. Ouch! Of course, investors have been perfectly happy overpaying for Nvidia's stock for some time now. In 2016 and 2017, the company's average price multiples were 55x and 48x earnings, respectively. And, by some accounts, it remains expensive compared to the overall market at 6.5x sales and 8.3x book. But, thanks to the recent decline, smart investors should take note and start building a position in the stock.
It's easy to see why investors have been paying up for Nvidia's shares. The company is the leading developer of 3D graphics and processing technology for computers, gaming consoles and other devices used for virtual reality and artificial intelligence. In fact, many believe that Nvidia's graphics processing units (GPU) will be crucial in further iterations of these new technologies. This forward-thinking outlook has led to an incredible trend of increased sales, with the company going from $3.4 billion in 2009 to over $12.4 billion in the last 12 months, and from losing $44 million to earning over $4.5 billion in that time.
More importantly, it's still growing. In the latest quarterly report, Nvidia posted earnings per share of $1.97 as revenue increased 20.5% year over year to $3.18 billion. The company is expected to book north of $8 per share by 2020. Thankfully, for investors who waited to buy the stock, Wall Street didn't think this growth was enough and continued to penalize shares of Nvidia.
Nvidia's current business is gaming, which is massive and only getting bigger thanks to eSports; however, the company is also well positioned to capitalize on the future of both data and artificial intelligence. That is why paying 18x forward earnings right now makes total sense. In the next decade, Nvidia could very well repeat the performance of the last one, tripling sales and seeing another explosion in earnings. Even if the company gets it half right, the shares offer a high margin of safety and should outperform the overall market in the years to come.
Disclosure: I am not long or short Nvidia.
