Nvidia stock analysis: top reasons why the shares may go parabolic soon

Nvidia stock has pared back some of the gains from last week's strong earnings. Shares soared to $230 before pulling back to $220 today, even as several major announcements hit the wires. Several key catalysts now point toward the potential for a strong rebound.

Nvidia has several important catalysts 

Nvidia, the biggest company in the world, has made some important announcements that may boost its stock in the near term. One of the deals came today, when Lambda, a company that Nvidia backs, announced a $35 billion deal with Anthropic. This project is being developed by Hut 8, will have 350 megawatts, and will use Nvidia GPUs and other products. 

In addition to this, Nvidia announced strong financial results last week. Its revenue jumped by 106% in the last quarter to $86 billion and boosted its forward guidance. It also predicted that its revenue will jump to $108 billion in the current quarter. 

Based on its historical performance, this means that its revenue will be higher than its guidance. In this case, chances are that it will make over $112 billion since management tends to be highly conservative. The same will happen in terms of its earnings.

Further, and most importantly, the company’s guidance was stronger than expected. Its revenue for the next financial year is expected to grow by 77%, higher than the 44% that analysts were expecting. 

This growth has helped the company to repurchase millions of shares. It repurchased shares worth $26 billion in the second quarter and has $99 billion remaining in its obligation. Nvidia has reduced its outstanding shares to 24.15 billion, much lower than 25.06 billion in 2022.

Share repurchases helped to boost a company’s performance by increasing the earnings-per-share (EPS). This happens as the company reduces the number of shares in circulation, which also boosts the amount of dividends they receive. 

Nvidia trades at bargain levels

In the perfect space, a company like Nvidia that is growing this fast and has a strong market share should have a high valuation multiple. This is not the case with Nvidia, a company whose valuation metrics are in line with the broader market.

The company has a forward price-to-earnings ratio of 23, much lower than its five-year average of 42. This multiple is also in line with that of the S&P 500 Index.

At the same time, the company has a Rule of 40 multiple of 128% based on the free cash flow margin. Based on the operating and net margins, the multiple is 172% and 168%, respectively. A company is said to be cheap whenever the multiple is above 40%.

These fundamentals explain why analysts are highly bullish on the company, especially after the last earnings report. The average estimate among analysts is $322, up by nearly 50% from the current level. The most bullish analyst is Raymond James’ Simon Leopold who has a target of $515. 

NVDA stock technical analysis

Nvidia stock chart | Source: TradingView

The weekly chart shows that Nvidia shares have stalled in the past few weeks. It has remained above the 50-week exponential moving average (EMA) and the Supertrend indicator. 

The stock is also above the ascending trendline that links the lowest level since May 5 this year. Therefore, the most likely scenario is where the stock continues rising, potentially to the psychological level of $300.