Is It Too Late to Buy NVIDIA?

Graphics chip giant NVIDIA has enjoyed a remarkable rally over the past year thanks to the hype around artificial intelligence and its explosive Q4 results but can the stock maintain its momentum, or is a sharp pullback inevitable? 

Labeled as “the most important stock on planet Earth” by Goldman Sachs following NVIDIA’s (NASDAQ:NVDA) Q4 results, shareholders have ridden a skyrocketing rally over the past several months. The company’s integral role in the AI boom made investors consider the stock a must-buy to capitalize on the enormous prospects of AI.

NVIDIA’s shares have returned almost 300% over the past year, making shareholders considerably more wealthy.

Moreover, the stock added more than $1 trillion in market value within the first quarter of this year, gaining more than 80% year-to-date.

With a market capitalization of $2.27 trillion, NVIDIA currently ranks higher than Google parent Alphabet Inc. (NASDAQ:GOOGL).

Rising demand for its GPUs amid companies trying to enhance their AI capabilities has brought NVIDIA into focus. The company’s innovative and powerful graphics processing units (GPUs) are preferred for training and running Large Language Models (LLMs), which most generative AI tools are built on. 

Is NVIDIA Poised to Maintain Its Market Dominance?

CEO Jensen Huang’s firm has constant innovation in its DNA and its next-generation capabilities helped it to become one of the top companies driving the AI revolution.

The GPU market is expected to be worth $70.9 billion this year and grow at a CAGR of 32.2% to reach $1.16 trillion by 2034

The AI GPU market is dominated by Nvidia with approximately 80% share. The company is expected to sell between 1.5 million to 2 million AI GPUs this year.

While other chipmakers are making significant progress to grab the AI GPU market share, NVIDIA is well positioned to hold the lion’s share for the foreseeable future, thanks to its ability to forecast and execute on next-generation trends.

Do NVIDIA’s Financials Justify Its Performance?

For the fiscal fourth quarter ended January 28, 2024, NVIDIA’s revenue increased by 265% year-over-year to a record $22.1 billion, beating its own guidance of $20 billion. Also, the company’s full-year revenue came in at $60.9 billion, up 126% year-over-year.

NVIDIA has been benefitting from the demand for AI chips and GPUs across enterprises. Its non-GAAP EPS came in at $5.16, marking a 486% increase from the year-ago period.

Moreover, management reported record Data Center revenue of $18.4 billion, representing 409% growth from the year-ago quarter. They attribute this growth to the NVIDIA Hopper GPU computing platform and InfiniBand end-to-end networking.

As enterprises focus on building modern data centers with next-generation capabilities, the demand for NVIDIA’s portfolio has increased. Amid robust demand, the company expects the supply of its next-generation products to fall short as demand exceeds supply.

More than half of the chipmakers’ data center sales are attributed to supplies from large cloud providers. Moreover, NVIDIA revealed AI inference accounted for about 40% of data center revenue over the past year.

The company’s data center revenue growth was marred by the recent U.S. export restrictions for advanced AI semiconductors to China. However, the chipmaker has been developing AI chips exclusively for the Chinese market, complying with U.S. regulations.

Management believes the company will be able to maintain its operational performance in the foreseeable future. The company sees robust demand for GPUs amid the increasing application of generative AI and the ongoing shift toward NVIDIA’s accelerators.

Is It Too Late To Buy NVIDIA?

It’s almost too late to buy NVIDIA according to 45 analysts, who have a consensus $915 per share price target, suggesting a modest 4% upside.

C.J. Muse, a Cantor Fitzgerald analyst, sees significant upside potential in the stock. The analyst boosted his price target to $1,200 from his earlier forecast of $900 citing optimism about the company’s upcoming GTC conference. He believes NVIDIA will disclose some promising business updates.

It’s noteworthy that beyond NVIDIA’s core offerings, it serves diverse market segments, including autonomous driving, robotics and drug discovery.

The company’s collaborations with tech giants like Alphabet Inc. and Microsoft Corporation (NASDAQ:MSFT) in developing advanced AI-powered applications are likely to keep expanding its end markets.

In addition, the recovery in the PC market is expected to boost its business. Inflationary pressures had led PC sales to decrease, significantly affecting NVIDIA’s financials as the company had been mainly dedicated to the graphics business before it advanced its AI offerings.

According to Gartner, worldwide PC shipments for the fourth quarter of 2023 came in at 63.3 million units, marking a marginal increase of 0.3% year-over-year.

Quarterly PC shipments rose for the first time after eight straight quarters of decline, reflecting improving consumer confidence. Moreover, the U.S. PC market grew 1.8% year-over-year, indicating the first increase since the second quarter of 2021.

Is NVIDIA Too Expensive to Buy Now?

The spectacular price surge over the past year has certainly been rewarding for investors. But NVIDIA’s massive rally has resulted in a company priced to perfection when viewed through the lens of valuation. Its price-to-earnings (P/E) ratio of 76.22 is much higher than most of its industry peers.

On EBIT, price-to-book and revenue multiples, NVIDIA is trading at highly elevated levels. A discounted cash flow analysis also paints a more pessimistic picture with an $816 per share fair value target.

But there is reason to be optimistic still. In terms of the trailing-12-month price-earning-to-growth (PEG), the stock is trading at 0.13x, which indicates that it’s still undervalued considering its massive growth prospects and has plenty of upsides left. So perhaps

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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.