NVIDIA (NASDAQ:NVDA) has been one of the strongest investments to own over the last several years as the AI boom has driven a surge in demand for computing power. Recently, however, the stock has stalled out, raising questions about whether and to what extent its run can continue. Will NVIDIA stock double again from here, or has NVDA’s incredible streak of returns finally reached its logical limit?
NVIDIA’s Moat and Growth Tailwinds
The bull case for NVIDIA hinges on its near-absolute dominance as a maker of advanced processing chips needed for AI, a market that is expected to see high growth rates for the foreseeable future. NVIDIA’s GPU market share still exceeds 90 percent, despite the efforts of competitors like AMD and Intel. By some estimates, the global data center GPU market could be worth over $265 billion by the year 2035, with CAGRs of nearly 30 percent prevailing over most of the next decade. As the primary manufacturer of GPUs, NVIDIA is the business that’s in the best position to benefit from this strong secular growth trend.
NVIDIA’s ongoing development of new and better GPUs also presents it with large opportunities ahead as increasingly complex AI models and heavier demand increase the need for processing power. The company’s new Vera Rubin chips, expected to ship later this year, promise up to 10 times the per-watt performance of its current Blackwell chips. With data centers searching for ways to improve power efficiency, these chips could prove to be yet another large revenue driver for NVIDIA.
NVIDIA once again showed off the benefits of these trends in its recent Q4 earnings report, which saw quarterly revenues rise 73 percent on a year-over-year basis to $68.1 billion. Net income rose at an even faster pace, achieving year-over-year growth of 94 percent to reach $43.0 billion. EPS for the quarter was $1.76, compared to $0.89 in the year-ago quarter.
NVIDIA’s scale and pricing power have also enabled it to achieve a fairly remarkable level of profitability. In addition to its net margin of over 55 percent during the last 12 reported months, NVIDIA has delivered a return of 101 percent on invested capital, 81 percent on assets and 111 percent on equity. These metrics underscore NVIDIA’s unique economic characteristics as a business that stands as the pick-and-shovel play at the center of a new technology boom.
Has NVIDIA Become Undervalued?
Although NVIDIA’s growth is still impressive, the stock has produced largely flat returns over the last six months and has actually fallen a bit since the beginning of the year. NVDA is still trading at about 44 times trailing 12-month earnings, but this is a significant downgrade from the P/E of 50 it commanded as recently as last July.
NVIDIA’s real value, however, can be found in its long-term expected earnings growth. Through the next 3-5 years, analysts are anticipating compounded annual EPS growth of about 35 percent, closely tracking the expected growth of the GPU market in general. If the business can meet these growth expectations, there will likely be significant upward pressure on NVIDIA shares over the next several years. The contraction in the stock’s earnings premium over the last several months, meanwhile, could provide investors with an attractive entry point and give NVDA less of a valuation headwind to fight against going forward.
Where Do Analysts See NVIDIA Going?
While current price forecasts don’t suggest that NVIDIA will double in the next 12 months, they do anticipate significant amounts of upside for the stock. The consensus price target at the moment is $263.39, implying an upside of 48.2 percent from the last trading price of $177.19. NVIDIA also still holds an overwhelmingly strong buy rating, with 47 of the 50 analysts covering the stock currently rating it as a buy.
Are NVIDIA’s Risks Growing?
Although NVIDIA still seems to have a long runway for growth ahead of it, there could also be some significant risks ahead. To start with, the market seems to be increasingly concerned about the extremely high valuations that have been attached to AI businesses up to this point, a fact that accounts for NVIDIA’s stagnant returns over the last six months. With fears of an AI bubble growing, NVIDIA could easily see a correction if and when the market grows less optimistic on AI stocks.
Another significant risk is that of input shortages that could raise NVIDIA’s costs and limit its production capabilities. The surge in AI over the last few years has strained global supplies of memory chips, increasing costs. NVIDIA has already announced that its gaming GPU business will be facing significant supply issues through the next two quarters as it prioritizes its data center GPUs. While the computer memory shortage will likely even out in the long run as manufacturers increase production, it could be a major factor for NVIDIA and other AI hardware businesses for the foreseeable future.
Finally, application-specific integrated circuits could start to eat into NVIDIA’s GPU moat over several years. Increasingly being used for their efficiency and cost advantages, ASICs will likely have a large place in the future of AI infrastructure. At the moment, however, they don’t seem to pose an existential threat to demand for GPUs for general-purpose AI computing.
Will NVIDIA Double Again?
Barring a massive unexpected shift in the dynamics of the GPU market, another doubling from NVIDIA would seem to be more a matter of when than if. While it seems unlikely that the stock will double over the next 12 months, NVDA shares could produce market-beating returns and reasonably double again within the next 2-3 years if earnings growth proceeds as expected and the stock’s valuation ratios don’t experience further compression.
While NVIDIA’s forward returns may be slightly slower than investors have become accustomed to due to its already massive market cap, the stock still looks like it could be a promising one to own over the next several years. With no slowdown in spending on AI on the immediate horizon and NVIDIA’s GPU dominance still making it by far the largest player in the market, NVDA could remain a strong generator of compounding returns over the long run.
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