How High Can NVIDIA Go?

After surging to over $1,000 per share in the wake of an excellent Q1 earnings report, chipmaker NVIDIA (NASDAQ:NVDA) is once again the subject of intense investor interest.

The company was able to raise its revenues by 262% and net income by 628%. With no slowdown in spending on NVIDIA’s AI chips looking likely anytime soon, it seems probable that the high rate of growth will continue well into the future.

Despite its exceptional performance and solid future prospects, NVIDIA continues to trade at a steep valuation. The stock is currently priced at around 48x forward earnings and nearly 86x cash flow, both extremely high multiples for a company as large as NVIDIA.

This leaves investors to wonder how much room NVDA shares could have left to run. How high can NVIDIA go, and will the company be able to continue delivering strong earnings growth?

The Outlook for the AI Chip Market

To a large degree, NVIDIA’s fortunes will be determined by the demand that AI investment will create for its GPUs.

In a recent interview, CEO Jensen Huang laid out his views on demand for these chips over the next several years. According to Huang, replacing existing data center infrastructure alone will yield about $1 trillion worth of demand for chips similar to NVIDIA’s.

When new capacity being added is taken into account, that number could jump to $2 trillion over the next half-decade.

Through 2030, analysts expect the AI chip market is expected to grow at a compounded annual rate of 39.7% to eventually reach about $228 billion per year.

If NVIDIA can maintain its roughly 80% market share in the AI chip market, this would translate to around $182 billion in sales per year for the company, about tripling the trailing 12-month number of $60.9 billion. It should be noted that this projection undercuts Huang’s.

Another point to consider is the fact that more computing capacity will likely be required as AI becomes more advanced.

Large language models (LLMs) of the type that have made today’s generative AI possible are limited by what is known as a context window. The larger the context window, the more text or other data the model can process at once. Larger context windows allow for deeper and more nuanced understanding of large, complex texts.

However, context windows are limited by computing power and memory usage, which both increase as the window is made larger.

For AI to become more useful in a wide range of applications, context windows will need to continue growing. This fact could favor NVIDIA significantly over the long run, as future models could create even more demand than expected for its chips.

With so many tech companies innovating in the AI space, NVIDIA’s pick-and-shovel play on the technology could remain attractive for several years to come.

Can Any Company Unseat NVIDIA?

Because of the high growth expectations implied by its valuation, NVIDIA must stay at the top of its industry to justify its price tag.

At the moment, the company appears to have a moat around its business due to being the only company that is able to manufacture GPUs at its present scale. There are, however, some competitive pressures that are worth mentioning.

At the top of this list is AMD, a rival chipmaker. At $22.7 billion, AMD’s annual sales are only a bit over a third of NVIDIA’s. However, AMD is racing to catch up with its larger competitor.

Late last year, it was revealed that Meta and Microsoft were both buying AMD’s AI chips as they explored alternatives to NVIDIA. The company’s leading chips are similar in capability to the NVIDIA H100 GPU, creating at least an opportunity for AMD to begin seizing market share.

The private market is also attempting to create next-generation chips in an attempt to leapfrog NVIDIA as larger and more complex AI models continue to increase computational demands.

One notable company in this category is Cerebras, a startup that has managed to create a chip with about 62 times the computing speed of an NVIDIA H100. Chips such as these could be critical for powering the next generation of AI models, creating opportunities for younger chipmakers.

Finally, several tech titans are working on their own chips to cut costs and reduce their reliance on NVIDIA. Amazon, Alphabet and Meta have all invested in their own manufacturing capabilities.

These have the potential to become a long-term problem for NVIDIA, especially if these large tech companies begin selling their chips in addition to using them on a purely in-house basis.

Though none of these efforts looks likely to knock NVIDIA off of its throne anytime soon, investors will likely want to monitor the competitive landscape around the company carefully. Dominance of the AI chip market is baked into the value assumptions about NVIDIA. If the competitive situation changes, the stock’s long-term value proposition could also change quite a bit.

How High Can NVIDIA Stock Go?

NVIDIA shares have a projected upside of about 9.6% given that the consensus price target among analysts is $1,200 per share. About 90% of the analysts covering the stock rate it as a Buy.

NIVIDA’s earnings are also expected to continue rising over the coming 12 months, potentially putting additional upward pressure on the stock. Analysts foresee earnings rising by another 119% in the coming year, coinciding with a nearly 80% further increase in revenues.

Looking at a longer time frame, analysts expect NVIDIA’s earnings to grow at a compounded annual rate of 37.8%.

It’s interesting to note that this closely mirrors the expected growth rate of the AI chip market for the remainder of this decade.

Where Will NVIDIA Stock Be In 5 Years?

Using the projected earnings growth rate and expectations surrounding the AI chip market itself, we can get a sense of where NVIDIA could trade in the next five years.

In the trailing 12-month period, NVIDIA has reported GAAP earnings per share of $11.93. Using the expected growth rate and a discount rate of 10% over five years, this places the fair discounted cash flow (DCF) value of NVIDIA at about $490.

The company would have to sustain the same growth rate for a little over eight years to be fairly valued at its current price.

However, this discounted cash flow analysis may not tell the entire story when it comes to NVIDIA. This is because we can expect earnings to continue growing at a rapid rate well beyond the 5-year window as new innovations in AI create sustained demand for the company’s GPUs. As such, NVIDIA could still be valued as a growth stock even after another half-decade of rapid sales increases.

To get a rough sense of where the stock could be five years from now, let’s assume that the growth outlook for NVIDIA is still fairly strong by 2029.

If NVIDIA grows its earnings by 37.8% annually during that time as expected, EPS would reach around $59. With a price-to-earnings ratio of 30, this would put NVDA shares at about $1,780, or $178 after accounting for the upcoming 10-for-1 stock split.

Given NVIDIA’s current P/E, a ratio of about 30 would allow for quite a bit of contraction while also still reflecting high growth expectations.

Here, it’s at least worth mentioning the bear case on NVDA. The pessimistic view on this stock hinges not on NVIDIA’s performance but on its high valuation.

The numbers presented above represent a best-case scenario in which sales growth continues at an exceptionally high rate, margins remain stable and NVIDIA maintains its lock on the market. If any one of these conditions isn’t met, NVIDIA’s already high value multiples are likely to make it susceptible to price stagnation or even selloffs.

Taking everything into consideration, NVIDIA looks fairly likely to continue producing strong returns for the next several years. Investors would likely be unwise to expect a continuation of the extremely high return rates of the past year, but NVDA could conservatively still deliver low double-digit returns over the coming five years.

The high valuation does pose some risks, especially if NVIDIA’s competitors begin catching up to it. In the case of a high-profile stock like NVDA, investor sentiment is also likely to play a large role in how much higher the stock ultimately goes. All other things being equal, though, it doesn’t appear that NVIDIA will run out of gas soon if it can maintain its moat.

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