Nvidia was gaining early on Tuesday as the chip maker rode renewed optimism about artificial-intelligence. Now the question is whether it can close its discount to rivals.
Nvidia shares were up 1.7% at $210.06 in premarket trading. That was building on a 2.9% increase the previous day.
The stock is up 11% this year and 16% over the past 12 months. But it has lagged well behind the PHLX Semiconductor Index, which is up 61% this year so far through Monday's close.
Nvidia trades at a forward price-to-earnings ratio of 18.9 times according to FactSet, below the roughly 20 times multiple for the S&P 500 overall. The PHLX trades at an average forward multiple of 20.6 times, while for Intel it's 50.4 times and for Advanced Micro Devices it's 43 times.
"Investors have frequently asked us why a company with Nvidia's growth characteristics, financial position, cash generation, and market leadership can trade at a discount; we do not attribute it to the fundamentals," wrote Raymond James analyst Simon Leopold in a research note. "We think investors favored momentum and scarcity trades, and this placed Nvidia out of favor on those criteria."
The major issue for Nvidia is that the huge spending on AI chips is now being spread out among a wider range of semiconductor companies. Initial competition with Advanced Micro Devices has now broadened to include custom chip designers and specialists in central-processing units, including Intel.
"While we believe Nvidia loses share in the accelerator market, this does not alter our financial model or view on the stock," wrote Leopold. "We think the efficiency value of Nvidia's GPUs enable its customers to reduce the cost of producing tokens, which enables operators to improve profits."
Raymond James still has a Strong Buy rating on Nvidia stock, arguing it could gain if it directs more money to stock buybacks. Nvidia plans to return 50% of free cash flow to shareholders through dividends and buybacks this year, although it intends to step that up in future.
The average price target on Nvidia stock across Wall Street is $314.29, according to FactSet.
Nvidia was named a Barron's stock pick on May 13, when shares were trading at $226.
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