Nvidia's stock extends its surge - and this number shows why it's 'truly unique'

By Emily Bary

An analyst says Nvidia's margin stands out and is 'worth paying for'

Nvidia Corp. shares made sizable gains again Tuesday as the company continues to rack up its share of plaudits, this time from Melius Research analyst Ben Reitzes, who highlighted a metric that he said shows why the chip giant is "truly unique."

That's the company's 69% margin on the basis of earnings before interest and taxes - performance that Reitzes calls "nothing short of extraordinary."

"While the phrase 'a company's margin is another company's opportunity' isn't lost on us, we don't see anyone challenging Nvidia's margin in a major way for the next two years," he wrote. That's with the company due to start shipping its new Blackwell chip lineup later this year. Plus, Nvidia's (NVDA) Vera Rubin line sits on the horizon for calendar years 2025 and 2026, he said.

Nvidia shares rose about 7% on Tuesday, leading S&P 500 SPX gainers. The stock extended its post-earnings rally - up about 20% across the most recent three sessions - and its ahead 130% so far this year.

The company is now closing in further on a $3 trillion market capitalization, as its valuation currently is about $2.8 trillion.

Even if Nvidia margins do come down, Reitzes said that levels anywhere above 60% would still be unique given the scale of Nvidia's business. "We argue it is worth paying for," he wrote, while reiterating a buy rating and $1,250 target price.

Reitzes is also intrigued by what Nvidia could do with its swelling cash flow, which could amount to $240 billion plus over the next three years.

Opinion: Nvidia just created a new multibillion-dollar business from scratch

"Sure, Nvidia is the premier growth company right now, but it will have a huge cash balance soon," he wrote. It could be difficult for the company to make a big deal, so it may turn to meaningful buybacks, with Reitzes illustrating that $200 billion in stock buybacks at current prices would translate to an 8% reduction in the number of Nvidia shares outstanding.

"This kind of optionality is worth paying for - just ask Apple bears who have seen its multiple sustain a mid-20s-to-30x [price to earnings ratio] for the last four years in a mature state, as it executed huge buybacks," Reitzes wrote.

See also: Here's what is so amazing about Apple's stock buybacks

And he called out that Nvidia shares look attractive on the basis of their growth-adjusted price-to-earnings ratio. The stock's ratio of price to earnings to growth is about 1.1 when factoring in "conservative figures," Reitzes said, and that's well below what's sported by chip peers like Qualcomm Inc. and Broadcom Inc. - as well as major software companies such as Salesforce Inc.

"Semis leaders like Nvidia are arguably in better shape than some [software-as-a-service] 'leaders' who are yet to prove that AI is incremental to the story in our opinion," Reitzes said in his note to clients. "In fact, one could argue that Nvidia's AI factories are creating software soon at such a pace, it is eating them."

Read: Nvidia is sporting growth one tech CEO says hasn't been seen 'in the history of capitalism'

-Emily Bary

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05-28-24 1714ET

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