How High Can This Healthcare Stock Soar With Nvidia's Help?

While the artificial intelligence (AI) era is benefiting many companies in various industries, semiconductor giant Nvidia(NVDA) is experiencing the best of it. Nvidia's high-powered graphic processing units, or GPUs, are in high demand. With its leadership in GPUs and AI, Nvidia is significantly contributing to the healthcare sector in several transformative ways.

One such company is healthcare juggernaut Johnson & Johnson (JNJ), also known as J&J. J&J is a multinational corporation recognized for its diverse portfolio of pharmaceuticals, medical devices, and consumer health products. 

Valued at $396.1 billion, JNJ stock is up less than 4% year to date, compared to the S&P 500 Index's ($SPX)gain of 17.9%. While J&J is already a powerful brand on its own, Nvidia’s AI models can help boost the company’s MedTech segment. Let’s find out more. 

Nvidia is Boosting J&J MedTech Segment

Founded in 1886, Johnson & Johnson has made a powerful mark in the consumer and healthcare sectors. The company took strategic steps to streamline its operations and focus on its core strengths. The most notable recent move is the spinoff of its consumer health division, Kenvue(KVUE), into a separate company. This spin-off is expected to increase value by allowing J&J to focus on its higher-margin pharmaceuticals and medical devices businesses.

Although its consumer products were a household name, JNJ has more opportunities in the rapidly expanding pharmaceutical and medical technology industries. Here, Nvidia enters the picture. NVIDIA's AI Clara platforms are being used in healthcare and robotic surgery systems to improve precision in minimally invasive surgical (MIS) procedures. These systems can process and analyze data in real-time, assisting surgeons with complex procedures.

In March, Nvidia and Johnson & Johnson collaborated to deploy AI-powered applications in J&J's surgery suites using the NVIDIA IGX edge computing platform and the NVIDIA Holoscan edge AI platform. Talking about the collaboration, Tim Schmid, Worldwide Chairman of JNJ’s MedTech division, stated, “Our deep heritage in healthcare and digital ecosystem in surgery and NVIDIA’s AI platforms hold enormous potential to create a more connected surgical experience.”

Furthermore, in an interview with CNBC, J&J said that its MedTech segment is responsible for developing tools and solutions for a wide range of serious conditions, including heart failure, kidney disease, and stroke, with their technology used in over 75 million procedures annually. Nvidia's partnership could be beneficial, as it has previous experience working in the medical device industry.

In the second quarter, JNJ's MedTech segment generated $7.9 billion in sales, a 2.2% increase over the same period last year. It contributed 35% of the total revenue of $22.4 billion. This increase was driven by the expansion of its electrophysiology products and Abiomed's operations. J&J acquired Abiomed in 2022 specifically to expand its MedTech business.

In another strategic move to expand the segment, the company recently announced plans to acquire V-Wave Ltd, a privately held company that develops treatments for patients with heart failure. The transaction is valued at $600 million, and is expected to close by the end of the year.

The global MedTech market is expected to reach $775.8 billion by 2029, and Intuitive Surgical (ISRG) has already established a dominant position in the MIS market. J&J, with the help of AI and Nvidia, can accelerate the growth of its MedTech segment, potentially challenging Intuitive's market position. 

Johnson & Johnson’s Business Strength is Impressive 

The company’s other core segment,Innovative Medicine (formerly Pharmaceutical), which manufactures life-changing drugs, contributed 64.5% to the top line in Q2. Sales increased 8.8% YoY (excluding sales of the COVID-19 vaccine) to $14.5 billion. J&J's total reported sales rose 4.3% to $22.4 billion, while adjusted earnings per share (EPS) climbed 10.2% to $2.82. 

Darzalex and Erleada, the company's oncology drugs, contributed $3.6 billion in revenue. Furthermore, immunology drugs Stelara and Tremfya generated combined sales of $3.79 billion in the second quarter. In neuroscience, Spravato's sales increased by 60.2% YoY in the second quarter.

At the end of Q2, J&J had $25 billion worth of cash and marketable securities and $41 billion of debt. The company also generated free cash flow of $7.5 billion. 

J&J's business strength has enabled it to increase dividends for the past 62 years, earning it the title of Dividend King. These are companies that have increased their dividends consistently for at least 50 consecutive years. 

JNJ stock has a forward dividend yield of 3.01%, which exceeds the healthcare sector average of 1.58%. Its current dividend payout ratio of 46.4% appears to be sustainable, with room for dividend growth.

Analysts expect J&J's revenue and earnings to grow by 3.9% and 0.77%, respectively, in 2024. In 2025, revenue and earnings are expected to increase by 2.9% and 7%, respectively. In terms of valuation, JNJ is trading at 16 times forward 2024 earnings, which is relatively lower than its historical average P/E multiple of 23.9x. 

What Does Wall Street Say About JNJ Stock?

Recently, RBC Capital analyst Shagun Singh reiterated a “strong buy” equivalent rating for JNJ, with a price target of $175. Singh believes the V-Wave Ltd deal will be beneficial for JNJ's cardiovascular portfolio.

Overall, analysts have an average rating of “moderate buy” for JNJ stock. Out of 20 analysts, six have a “strong buy” rating, two have a “moderate buy” rating, and 12 suggest a “hold.”

Analysts have assigned a mean target price of $171.26 to JNJ, implying a 5% upside from current levels. Its Street-high estimate of $215 suggests the stock can rally as much as 31.9% over the next 12 months.