How far out does a Club stock price target project: three months out, six months out, or one year out? For example, you raised guidance on NVDA to $300 per share. How far away time-wise is this projection? Best Regards, Terry In general, our targets represent the price level we expect the stock to realize in the next six to nine months. To understand why, it’s important to remember what exactly a price target is: our best estimate of a company’s fair value, given all the information that we have. Our price targets are based (usually but not always) on earnings estimates for the next full fiscal year. For Nvidia (NVDA), our price target for the dominant artificial intelligence chipmaker of $300 per share is based on the current fiscal year’s forward earnings estimates. Nvidia has a weird calendar: fiscal 2024 (FY24) started in February 2023 and runs through the end of January 2024. At around $260, Nvidia now trades at 57 times the sum of earnings estimates over the next four quarters. At $300, nearly 15% higher than current levels, the stock would go to 67 times based on those same FY24 estimates. However, it would go down to 50 times forward fiscal 2025 (FY25) earnings estimates. The estimates we base our targets on are just that — estimates. The thinking is that as each quarter rolls in and we get actual numbers — assuming the actual results meet or exceed the estimates — the stock will trend toward our target as investors gain confidence in management achieving, if not exceeding, the full-year estimate. One thing to keep in mind regarding estimates is that analysts are constantly revising their estimates up or down based on checks and trends. They also update their price targets based on these updated estimates. As a result, sometimes price targets are moving targets versus planting a flag in the ground about one certain price. NVDA YTD mountain Nvidia (NVDA) YTD performance Now, the reason we view our targets as achievable in six to nine months (before all the quarters are reported) is twofold. First, Wall Street is always looking for where the puck is going, not where it is or where it’s been. So, if you wait for the entire year to play out, you’ll likely miss the whole move. That’s why we focus on forward estimates and not trailing results. Second, and this is important because it plays very much into our next example, a little over halfway through a company’s fiscal year (about six to nine months in), analysts tend to increase their focus on the next fiscal year and begin placing more weight on that number. As that happens, the stock begins to screen cheaper — assuming that earnings will increase the following year. (In Nvidia’s case, it’s currently expected to grow over 30% in FY25.) Shares can move higher without being viewed as more expensive based on valuation. To help drive the point home, consider that at $260 Nvidia trades at 57 times FY24 earnings estimates. However, at $300, based on FY25 numbers, shares trade at 50 times. So due to earnings growth, as analysts begin to focus on that FY25 number in six to nine months Nvidia can trade up to $300 while being viewed as less expensive on valuation as the FY25 numbers come into play. This also demonstrates why it’s so much more important to think about a stock’s valuation and not simply the share price. As we see here, based on our numbers, shares of Nvidia can advance a little over 15% to our $300 target while the valuation multiple based on FY25 estimates (the multiple, not the actual valuation) declines by a little over 12% — from 57 times to 50 times. FL YTD mountain Foot Locker (FL) YTD performance In our latest initiation, we’re basing our Foot Locker (FL) price target of $45 per share on fiscal 2024 (FY24) earnings estimates. We’re looking past estimates for the current year — because for us, Foot Locker is a turnaround story that’s going to take longer to play out. That’s what you have to do with a turnaround story, think about the appropriate valuation once the turnaround is complete. The stock currently trades at about 10.5 times forward multiple. At that same valuation, plugging in FY24 earnings estimates — which is what analysts will begin to do in six to nine months as we begin to close out 2023 and look to next year, a time period when the impact of the “Lace Up” strategy will begin to be felt — we arrive at the $45 target that we think is fair value for Foot Locker shares. Our price target is roughly 15.5% higher compared to Monday’s close. Ultimately, our Foot Locker target is not about the stock being undervalued at the current multiple but rather about the company’s turnaround strategy taking hold and driving higher earnings in the out year. Bottom line Hopefully, these two examples serve to demonstrate why we think about price targets on a six- to nine-month basis, while also addressing some of the factors to consider when developing your own price target. (For a look at how to arrive at our price targets in the first place, we’ve written about that in a previous commentary .) It can be very tempting to think only about the current fiscal year, but to do so as investors would be wrong. In Foot Locker’s case were talking about a rebound in earnings followed by what we believe will be low- to mid-twenties percentage earnings growth annually from 2024 to 2026. In the case of Nvidia, we are talking about a company that just had its down earnings year in 2022 and is currently expected to grow earnings at an average rate of about 33% per year for the next five years. In the end, it always comes down to the earnings and the expected growth of those earnings. Unless we’re focused purely on some form of shareholder cash return (dividend levels or buyback activity) — in which case our focus is income and we are less concerned about growth — we must be mindful that value and growth are tied at the hip. (Jim Cramer’s Charitable Trust is long NVDA, FL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. 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Jen-Hsun Huang, president and chief executive officer of Nvidia Corp., announces the EGX Edge Supercomputing Platform during the company’s event at Mobile World Congress Americas in Los Angeles, California, Oct. 21, 2019.
Patrick T. Fallon | Bloomberg | Getty Images
How far out does a Club stock price target project: three months out, six months out, or one year out? For example, you raised guidance on NVDA to $300 per share. How far away time-wise is this projection?
Best Regards,
Terry
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