Nvidia (NASDAQ:NVDA) stock has had a great year, as it’s jumped 58% in 2019.
As we head into the 35-day holiday stretch on Thursday, I can only assume that longtime owners of NVDA stock have one wish this Christmas: They want Nvidia stock to deliver a repeat performance in 2020.
Can it be done?
If the global economy cooperates, Nvidia stock has a reasonable shot to make the wish come true. Here’s why.
A Trade Deal in Hand
Forbes contributor and veteran financial commentator Jon Markman recently noted that Nvidia CEO and co-founder Jenson Huang plans to connect the world of information through the company’s Smart Everything Revolution.
Markman describes how the company built new computing platforms at the edge of networks, enabling it to achieve tremendous success.
What Markman’s getting at is that Huang, like many CEOs, is actively figuring out how to become totally independent and free of undue influence by China, which accounts for 30% of Nvidia’s revenue. And one way to reduce the impact of political fights is to design a product that everybody wants and needs.
Markman’s column drives home the fact that, while a real and lasting trade deal between the U.S. and China will help the global economy, the best way for NVDA to achieve lasting success is to focus on what it can control.
Many companies have altered their supply chains so that China isn’t at the center of their universes, but that’s only a temporary solution. A more permanent solution is to build a product so great that it won’t matter which countries are fighting with each other.
My back-of-the-napkin estimate suggests that a comprehensive trade deal — I’m not talking about a Phase 1 agreement — could trigger a 20%-30% pop by Nvidia stock.
Assuming a comprehensive trade deal is completed by the end of 2020, NVDA has to raise NVDA stock by another 28%-38% to increase it by the same amount by which it’s risen in 2019.
Can NVDA Stock Jump 58%?
As Markman points out, Nvidia stock trades at 29 times analysts’ average forward earnings estimate and 13 times its sales. Nvidia stock was cheaper in 2018, when it could be bought for 19 times the average forward earnings estimate and seven times its sales. But its multiples are not as high as they were in 2016 and 2017.
Assuming Nvidia’s price-earnings multiple stays at 29, for Nvidia stock to jump 58% next year, it will have to earn $7.1 billion. So far this year, it’s made $2.4 billion, and its Q4 results have not been announced yet. Analysts, on average, expect its Q4 net income to reach $1.1 billion.
That means it will have to roughly double its net income in 2020 or its multiple will have to move higher. If its net income rises, the multiple of Nvidia stock will almost definitely increase as well.
In July, I suggested that Nvidia’s free cash flow (FCF) was integral to its success. In Q3, its FCF jumped almost 50% YoY to $1.5 billion, or almost 50% of its Q3 revenue of $3 billion
With Nvidia’s FY20 top line expected to be $11.7 billion, it ought to generate at least $4.0 billion of free cash flow, about $900 million higher than in FY19.
Can Nvidia stock appreciate 58% in 2020?
It may, but a lot has got to go Nvidia’s way for such a rally to materialize.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.