On June 18th, something that was completely unthinkable just a year ago, NVIDIA (NASDAQ:NVDA) At one point, the company had a market capitalization of $3.34 trillion, knocking Microsoft off the top spot as the world’s most valuable company.
Given this significant milestone, investors are beginning to wonder whether the AI chip giant can sustain its strong performance, said Truist analyst William Stein, the fourth-ranked analyst among thousands of Wall Street stock professionals.
His conclusion? “A thorough analysis of the data suggests that being the largest company by market cap poses no systematic threat to future investment returns,” Stein noted. “Specifically, four of the other five companies that reached #1 after the tech bubble went on to outperform the S&P over the following five years.”
To outperform the S&P 500, you must grow your P/E ratio faster than the index, grow your EPS at a faster rate, or both. Increasing your P/E ratio is easy to understand, but growing your EPS faster than the index requires you to outperform the index in one or more of the following areas: (1) organic sales growth, (2) operating profit margins (OPM), (3) non-operating margins (below line items), (4) inorganic growth, or (5) share reduction (share buybacks).
So how does Stein think Nvidia can continue to outperform the S&P? Further multiple expansion (currently at 44x NTM EPS) seems “very unlikely,” operating margins (approaching 70%) have limited room for improvement, any major acquisitions would likely face heavy scrutiny and may not have a big impact, and share buybacks, while effective, are unlikely to be highly profitable given the current P/E multiple.
That leaves “the old-fashioned way – growing profits through organic sales growth,” which Stein believes is “the only reliable way.”
So what does this mean for investors? Stein rates NVDA shares a Buy and has a $140 price target, suggesting room for modest 8% growth over the next few months. (To watch Stein’s track record, go to click here)
The Street’s average target is in line with Stein’s. As for the rating, 36 other analysts are also bullish, and four more have hold (i.e. neutral) ratings, which doesn’t do much to dent the stock’s consensus rating of “strong buy.” Nvidia stock price prediction)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is for informational purposes only. It is extremely important that you conduct your own analysis before making any investment.
