On June 18, in what would have seemed utterly improbable just a year or so ago, NVIDIA (NASDAQ:NVDA) Apple briefly became the world’s most valuable company, reaching a market cap of $3.34 trillion, knocking Microsoft off the top spot.
Following the milestone, Truist’s William Stein, a fourth-ranked analyst among thousands of Wall Street stock market professionals, noted that investors are beginning to wonder whether the AI chip giant can sustain its strong performance.
But what conclusion did he reach? Stein noted that “a comprehensive analysis of the data suggests that becoming the largest company by market capitalization does not appear to pose a systematic challenge to future investment returns. Specifically, four of the other five companies that became the number one company since the tech bubble outperformed the S&P over the ensuing five-year period.”
For a stock to outperform the S&P 500, it must either grow its price-to-earnings ratio faster than the index, grow its earnings per share faster, or do both. While improving its price-to-earnings ratio is easy to understand, growing earnings per share faster than the index requires outperforming the index in one or more of these areas: “(1) organic sales growth, (2) operating profitability, (3) non-operating profitability (less listed items), (4) inorganic growth, or (5) share reduction (buybacks).”
But how does Stein think Nvidia will continue to outperform the S&P? Well, the multiple expansion (currently at 44x P/E) seems “highly unlikely,” the margin of improvement in operating profit (close to 70%) is limited, large acquisitions are likely to face intense scrutiny and thus may not have much impact, and while buybacks are effective, they are unlikely to generate significant returns given the current P/E multiple.
This leaves us with “the old-fashioned way: growing profits, through organic sales growth,” which Stein considers “the only reliable way.”
So what does all this mean for investors? Stein rates NVDA shares a Buy, along with a $140 price target, meaning there’s room for modest 8% growth in the coming months. (To watch Stein’s track record, click here.)
The average Street target is in line with Stein’s. In terms of ratings, 36 other analysts are also bullish, with an additional 4 hold (i.e. neutral) ratings not enough to upset the strong buy consensus rating on the stock. (See Nvidia Stock Forecast)
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Disclaimer: The opinions expressed in this article are solely those of the analyst mentioned. The content is intended for informational purposes only. It is very important that you conduct your own analysis before making any investment.
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