Why Does NVIDIA Stock Have More Upside Potential?

NVIDIA (NVDA) stock gained 1.25% on Monday after an analyst increased the target price on the stock.

NVIDIA stock rose due to increased target price

Early on Monday, SunTrust Robinson Humphrey analyst William Stein increased the target price on NVIDIA stock to $216 from $210. However, he maintained a “buy” rating on the stock. Stein is bullish on NVIDIA stock. He expects improving demand trends and higher profitability ahead. In a note to clients, Stein said, “Of our proprietary semi and component supply chain contacts, multiple pointed to improving demand trends in all end markets: gaming, pro-viz, automotive, and most important, datacenter.”

NVIDIA stock closed at $174.84 on Monday. At the closing price, NVIDIA’s market capitalization is around $106.5 billion. The stock is trading 40.3% lower than its 52-week high of $292.76. Meanwhile, the stock is trading 40.5% higher than its 52-week low of $124.46.

The stock has returned 31.3% YTD (year-to-date). However, the company has underperformed most of its semiconductor peers. Chip stocks including Advanced Micro Devices (AMD), Marvell, Micron, and Qualcomm have gained around 65.9%, 55.1%, 56.3%, and 38.6% YTD. Also, the VanEck Vectors Semiconductor ETF (SMH) has increased more than 37% during the same period. Intel and Broadcom have increased 10.6% and 13.3% YTD.

Can NVIDIA stock rally more?

NVIDIA stock has witnessed a slowdown since October 2018 due to less cryptocurrency demand and the escalating trade war. The crypto bubble burst dented NVIDIA’s gaming business and its overall revenues. Notably, NVIDIA’s revenues have fallen in the past three quarters on a YoY (year-over-year) basis. The company had revenue growth for 13 consecutive quarters.

However, the stock has started regaining momentum since the company posted upbeat second-quarter results in late August. Although NVIDIA’s earnings declined YoY in the second quarter, it improved sequentially. The increase showed strength across the company’s platforms. The recent analyst upgrade also reiterated bullish signals on the stock.

Trade talks could revive NVIDIA stock

Progressive trade talks between the US and China revived NVIDIA stock. On September 20, President Trump reportedly granted tariff exemptions to more than 400 Chinese products. The products include plastic straws, dog leashes, and more products imported from China. On September 11, China’s Ministry of Finance announced that it exempted 16 US goods from tariffs. President Trump also agreed to delay the 30% tariffs on Chinese goods by two weeks until October 15. Notably, President Trump increased the tariffs to 30% from 25% on $250 billion worth of Chinese goods. Resuming trade talks between mid-level trade officials raised hopes for higher-level trade discussions in early October.

A trade deal would boost NVIDIA stock. The company is sensitive to the trade war. Meanwhile, the escalating trade war put NVIDIA’s planned acquisition of Mellanox at risk. The ongoing tariff war might increase graphics card prices.

New products to take on peers

NVIDIA is rolling out new products to take on AMD and regain its position in the GPU market. Lately, NVIDIA lost share to AMD in the GPU segment. The launch of AMD’s Navi-based 10 GPU in July impacted NVIDIA’s GeForce RTX 2070 Super lineup. According to TechSpot, AMD’s RX 5700 costs less than NVIDIA’s RTX 2070 and offers a similar gaming performance.

Recently, according to a Chinese website ITHome, NVIDIA launching a new graphics card might threaten AMD’s low-end graphics card dominance. NVIDIA plans to launch the GTX 1650 Ti graphics card for around $155 on October 22. The new GTX 1650 Ti would likely replace the GTX 1050 Ti variant. The new card might compete with AMD’s Navi 14 GPUs. Notably, the entry-level Navi 14, the RX 5600 series is set to launch before October 15. However, AMD might release two new graphics cards including Navi 21 and Navi 23, dubbed as the “NVIDIA killers,” in 2020.

NVIDIA focuses on boosting its business

The chipmaker has formed a partnership to expand its business and increase its revenues. NVIDIA also partnered with Microsoft (MSFT) to offer its RTX ray-tracing technology to Microsoft’s video games. NVIDIA wants to use GPUs to make more realistic video games.

The company is also focusing on the fast-growing AI market. Currently, there’s a high demand for AI chips. The chips are used in supercomputers, cloud services, smartphones, data centers, and driverless cars. NVIDIA is also focusing on its fast-growing data center business to increase its profits.

Analysts’ view on the stock

Analysts expect sales growth in fiscal 2021 in addition to a few lower quarters. They expect NVIDIA’s sales to fall 8.3% for the third quarter. Also, analysts expect the sales to fall 8.1% for fiscal 2020 ending in January. However, analysts expect the company’s sales to return to growth in fiscal 2021. The sales will likely increase 19.8% YoY in fiscal 2021.

Overall, analysts favor a “buy” rating on NVIDIA. Notably, 26 out of 39 analysts recommend a “buy,” ten recommend a “hold,” and three recommend a “sell.”

Currently, NVIDIA analysts have a 12-month target price of $186.49 on the stock. On Monday, the stock was trading at a discount of 6.2% to analysts’ 12-month target price. The median target price is $190.00 as of the same date.

Technical indicators

NVIDIA’s 14-day RSI (relative strength index) number is 52.01, which indicates that investors are neutral on the stock. An RSI reading above 70 indicates that a stock is in “overbought” territory, while an RSI level below 30 indicates that the stock is in “oversold” territory.

On Monday, NVIDIA stock closed near its Bollinger Band middle-range level of $174.71. The value shows that the stock isn’t overbought or oversold.

Looking at the technical indicators, we think that investors are neutral on NVIDIA stock. Meanwhile, we think that the stock has more upside potential due to trade progress and other positive events discussed above.