How High Will NVIDIA Go?

NVIDIA (NASDAQ:NVDA) has been among the top-performing stocks of 2023 so far. Up over 230 percent year-to-date, NVIDIA has reached new heights after losing much of its value in the tech stock contraction of 2022.

This sharp rally has left many investors wondering just how much runway NVIDIA has left. How high will NVIDIA stock go?

NVIDIA Analyst Price Forecasts

Among 44 analysts, the consensus estimate is for NVIDIA share price to rise as high as $622.50 per share, implying a 27.6 percent return from current levles.

NVIDIA enjoys a strong consensus Buy rating, with 40 of the 51 analysts covering the stock currently rating the firm as a buy.

A minority of analysts have offered much higher price targets for NVIDIA stock. The highest standing 12-month forecast at the moment is $1,100, more than 125 percent above the current price.

Underlying such positive estimates are bullish sentiments on the performance of the business. Goldman Sachs, for example, forecasts full-year revenue growth in excess of 40 percent from 2023 through 2025.

Value Investors Skeptical Of NVDA

While most analysts are optimistic about NVIDIA’s trajectory, the stock may be less appealing to value investors. At over 150 times cash flow, 35 times sales and about 45 times forward earnings, NVIDIA trades at an enormous premium by most traditional value metrics.

Perhaps more worryingly for value-oriented investors is NVIDIA’s price-to-earnings-growth ratio, which currently stands at 3.3. The PEG ratio, famously favored by Peter Lynch, is one of the most popular methods for valuing growth companies.

Traditionally, a PEG of under 1.0 indicates undervaluation. A ratio of 2.0 or higher, by contrast, suggests that a stock may be considerably overvalued. In NVIDIA’s case, this interpretation of the PEG ratio implies that NVIDIA is steeply overvalued.

NVIDIA’s Long-term Growth Potential 

Looking ahead, it’s likely that NVIDIA will continue to grow in conjunction with the emerging AI industry. By some estimates, this industry could be worth as much as $2 trillion by 2030.

As the leading producer of AI chips, NVIDIA is naturally in a position to benefit from this growth. Therefore, it seems plausible that NVIDIA will maintain a relatively high growth rate through at least the rest of this decade. 

NVIDIA is in a particularly attractive position for growth due to its dominance in the advanced semiconductor industry. Some analysts believe it could capture as much as 90 percent of the AI chip market, providing it a monopoly on the hardware powering this important new technology.

Although its position is not unassailable in a growing market with large incentives for potential competitors, NVIDIA appears to be poised to capture much of the early investment in AI.

Will NVIDIA Share Price Crash Back to Earth?

Slower-than-expected growth is among the major landmines sitting up ahead for NVDA shareholders. With the stock sitting at overvalued levels by any conventional measure due to expectations of rapid growth, there is little room for any execution missteps.

Similarly, reduced investor enthusiasm for AI’s potential could also cause NVIDIA’s P/E ratio to fall back to more reasonable levels.

As demand for AI chips heats up, NVIDIA could also be at risk from competitive threat should a serious rival for advanced AI computing hardware emerge. AMD stands out as a serious contender because it is currently rolling out chips designed specifically for the computing needs of widespread generative AI.

Although AMD is clearly moving in the direction of competing with NVIDIA, it’s unlikely that it could challenge NVIDIA’s market dominance anytime in the immediate future.

Finally, NVIDIA is likely to be one of the companies at the center of escalating trade tensions between the US and China over advanced semiconductors.

Some of NVIDIA’s top chips have already been banned for export to China, and the US government is considering further export curbs. These trade issues may even create an opening for AMD, which is considering a specialized China-friendly chip that will comply with the current rules and give it a greater presence in the Chinese market.

So, How High Could NVIDIA Eventually Go?

At the moment, NVIDIA’s share prices are elevated well above the range justified by the company’s current cash flows. As such, both the current pricing and any further increases in the near future will be driven by expectations of growth.

Given that NVIDIA shows no signs of plateauing this year, it seems reasonable to suppose that the roughly $625 range projected by analysts could be reached. 

Turning to the longer time horizon, NVIDIA will have to continue producing higher earnings in order to drive share prices higher. In 2023, management has been highly successful in this regard. The Q2 earnings report, for example, detailed year-over-year net income growth of 843 percent.

While NVIDIA obviously won’t be able to keep this growth rate up for very long, the company does appear to be in a good position to deliver high double-digit earnings growth for multiple years. As such, it’s far conceivable that the stock could eventually achieve the currently elusive $1,000 mark.

Along with the potential for gain, however, NVIDIA also carries a fair degree of risk. Trade problems, decreased investment in AI or competition from other companies could slow NVIDIA’s growth, potentially causing its share prices to stagnate or contract. 

NVIDIA may deliver market-beating returns, but it could also produce steep losses. As such, it may be a good idea for investors who choose to take on NVIDIA’s risks to keep their positions small until the company’s valuation is more in line with its actual earnings.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.