Is Nvidia Stock on Sale?

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Analysts have been busy updating their discounted cash flow models and price targets for Nvidia (NVDA) after the most important AI company in the world failed to give the sort of blow-out revenue guidance Wall Street has come to expect.

Indeed, shares in NVDA, the world's second most valuable publicly traded company with a market cap in excess of $3 trillion, actually stumbled after posting Q3 results.

But then these sorts of things can happen when a stock is said to be priced for perfection.

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Either way, it seemed like a good time to take a look at a few of the ways in which analysts' expectations have changed for NVDA stock in light of the company's latest guidance.

First, let's have a look at NVDA's price target. Although these targets are of limited utility, they do form the basis for declaring whether a stock is a Buy, Hold or Sell.

As of now, NVDA's average price target stands at about $170, up roughly 6% from the pre-earnings release target of about $160, according to data from S&P Global Market Intelligence.

NVDA's new average price target gives shares implied upside of about 20% over the next 12 months. The old price target – based off NVDA's previous level – gave the stock implied upside of about 13%.

It's hard to believe Nvidia has become a $3 trillion company because of its potential for 13% or 20% price upside over the next year or so. Heck, the stock nearly tripled over the past 52 weeks.

Price targets. Go figure.

Perhaps relative valuation can be more helpful.

Nvidia is cheap, relatively speaking

First, a caveat about valuation. While absolutely critical, valuation tends to play out on its own time frame. This time frame can be much longer than investors expect. Keep this in mind when looking at Nvidia, as the stock usually looks expensive and yet it keeps going up.

That said, NVDA's relative valuation does look increasingly compelling by some measures these days.

For one thing, while it's true that Nvidia changes hands at nearly 35 times analysts' average next-12-months earnings per share (EPS) estimate, this multiple represents a 20% discount to its own five-year average, according to data from LSEG Stock Reports Plus.

Perhaps more importantly, after updating their models, analysts' average long-term growth forecast now stands at more than 62%, per LSEG.

These revisions make NVDA look attractively priced once you consider how fast the stock is rising relative to its growth prospects. Indeed, by at least one metric – the price/earnings-to-growth (PEG) ratio – Nvidia stock looks very cheap on a relative valuation basis.

Here's why: since NVDA stock is trading at 35 times expected earnings and has a LTG forecast of more than 62, its forward PEG is 0.6. To put that in perspective, the S&P 500 trades at a PEG of 2.1.

By this measure, NVDA trades at a 70% discount to the broader market. That's not bad, but then Nvidia and the broader market are sort of apples and oranges.

That's why we want to look at Nvidia's PEG relative to its peers and itself. This gives us an idea of what sort of premium the market has been willing to pay for Nvidia's growth prospects in the past.

And what do we find? Bulls will be happy to know that with a PEG ratio of 0.6, Nvidia stock trades at a 70% discount to the semiconductor industry average.

Even more intriguing, however, is that NVDA stock also trades at a steep discount to its own five-year average. Indeed, per LSEG Stock Reports Plus, if Nvidia's PEG "returned to historical form," the stock would trade at $349.04.

That's not a price target, mind you, it's just some modeling. But it does give NVDA stock implied price upside of about 150% from current levels.

As for Wall Street's collective wisdom on this top-rated Dow Jones stock, of the 63 analysts issuing opinions on NVDA surveyed by S&P Global Market Intelligence, 47 call it a Strong Buy, 12 have it a Buy and four say it's a Hold.

That works out to a consensus recommendation of Strong Buy, making Nvidia one of the Street's top S&P 500 stocks to buy too.

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Dan Burrows is Kiplinger's senior investing writer, having joined the publication full time in 2016.

A long-time financial journalist, Dan is a veteran of MarketWatch, CBS MoneyWatch, SmartMoney, InvestorPlace, DailyFinance and other tier 1 national publications. He has written for The Wall Street Journal, Bloomberg and Consumer Reports and his stories have appeared in the New York Daily News, the San Jose Mercury News and Investor's Business Daily, among many other outlets. As a senior writer at AOL's DailyFinance, Dan reported market news from the floor of the New York Stock Exchange.

Once upon a time – before his days as a financial reporter and assistant financial editor at legendary fashion trade paper Women's Wear Daily – Dan worked for Spy magazine, scribbled away at Time Inc. and contributed to Maxim magazine back when lad mags were a thing. He's also written for Esquire magazine's Dubious Achievements Awards.

In his current role at Kiplinger, Dan writes about markets and macroeconomics.

Dan holds a bachelor's degree from Oberlin College and a master's degree from Columbia University.

Disclosure: Dan does not trade individual stocks or securities. He is eternally long the U.S equity market, primarily through tax-advantaged accounts.