Why Nova Ltd. (NASDAQ:NVMI) Could Be Worth Watching

Nova Ltd. (NASDAQ:NVMI), might not be a large cap stock, but it saw a double-digit share price rise of over 10% in the past couple of months on the NASDAQGS. With many analysts covering the mid-cap stock, we may expect any price-sensitive announcements have already been factored into the stock’s share price. However, what if the stock is still a bargain? Let’s take a look at Nova’s outlook and value based on the most recent financial data to see if the opportunity still exists.

See our latest analysis for Nova

What's The Opportunity In Nova?

According to my price multiple model, which makes a comparison between the company's price-to-earnings ratio and the industry average, the stock price seems to be justfied. I’ve used the price-to-earnings ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 18.3x is currently trading slightly above its industry peers’ ratio of 17.31x, which means if you buy Nova today, you’d be paying a relatively reasonable price for it. And if you believe that Nova should be trading at this level in the long run, then there should only be a fairly immaterial downside vs other industry peers. Is there another opportunity to buy low in the future? Since Nova’s share price is quite volatile, we could potentially see it sink lower (or rise higher) in the future, giving us another chance to buy. This is based on its high beta, which is a good indicator for how much the stock moves relative to the rest of the market.

Can we expect growth from Nova?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. However, with a negative profit growth of -1.5% expected over the next couple of years, near-term growth certainly doesn’t appear to be a driver for a buy decision for Nova. This certainty tips the risk-return scale towards higher risk.

What This Means For You

Are you a shareholder? Currently, NVMI appears to be trading around industry price multiples, but given the uncertainty from negative returns in the future, this could be the right time to reduce the risk in your portfolio. Is your current exposure to the stock optimal for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on NVMI, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping tabs on NVMI for a while, now may not be the most optimal time to buy, given it is trading around industry price multiples. This means there’s less benefit from mispricing. Furthermore, the negative growth outlook increases the risk of holding the stock. However, there are also other important factors we haven’t considered today, which can help gel your views on NVMI should the price fluctuate below the industry PE ratio.

So while earnings quality is important, it's equally important to consider the risks facing Nova at this point in time. In terms of investment risks, we've identified 1 warning sign with Nova, and understanding this should be part of your investment process.

If you are no longer interested in Nova, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.