Yet another bullish call on Nvidia's stock? Don't ignore this one.

By Emily Bary

A Melius Research analyst says 'you still get some eye rolls when you reiterate this buy,' but the setup for Nvidia shares 'is still pretty darn good'

After the first down quarter for Nvidia Corp. shares since 2022, one analyst says they're poised to lead again heading into the end of the year.

Nvidia's stock (NVDA) dropped 2% in the calendar third quarter, which snapped a streak of seven consecutive quarterly gains. But Nvidia shares are also up more than 150% so far in 2024, including a 2.7% bump in Monday trading. "So, while you still get some eye rolls when you reiterate this buy, the setup here is still pretty darn good," Melius Research analyst Ben Reitzes wrote in a note to clients.

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History suggests the stock could perform better in the final few months of the year, he noted, as the VanEck Semiconductor exchange-traded fund SMH has gained 9.4% on average across the past 14 fourth quarters, while it's risen only 2.6% on average in the third quarter.

Those trends have him feeling better about artificial-intelligence semiconductor plays in general. "We expect things to perk up more into year-end given indications for strong AI spending on training and inferencing, still driven by Nvidia," Reitzes wrote. "OpenAI, Microsoft (MSFT), Google (GOOG) (GOOGL) and Meta (META) are accelerating the release of more useful AI products - which drive increased usage and catalyze [graphics-processing-unit] consumption."

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On a company-specific level, Reitzes is encouraged by Nvidia's valuation. The stock "is still the second cheapest stock in our group on a [price-to-earnings-to-growth] basis at only 1x conservative 2025 estimates," he wrote.

In light of the big run-up in Nvidia shares over the past two years, investors want conviction in the sustainability of demand going forward. They could get some more clarity later this year, although there are also events early next year that Reitzes thinks could help.

"We believe investors will gain more confidence that 2026 is a strong growth year when we hear more about improvements in the new 'Rubin' chip slated for [calendar 2026] when CEO Jensen Huang speaks at his GTC show in March 2025," he wrote. "Not only will these catalysts make $5.00 in [earnings per share] power look doable, but then focus could start to shift to much higher EPS figure than that long-term."

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Nvidia investors also have been paying close attention to the company's gross margins, which dipped last quarter. But Reitzes thinks "we are now within about six months of a gross margin bottom and turn higher."

Reitzes has a buy rating and $165 price target on Nvidia's stock.

-Emily Bary

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10-07-24 1530ET

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