Artificial Intelligence (AI) has been the flavor of the season so far, driving up share prices of tech giants as they focus more on AI. This has resulted in the resurgence of the Nasdaq Composite, which gained more than 30% year-to-date. NVIDIA Corporation (NVDA) is at the forefront of this AI revolution, and investors’ interest in the stock led to its shares gaining more than 200% year-to-date.
NVDA founder and CEO Jensen Huang earlier this year said, “AI is at an inflection point, setting up for broad adoption reaching into every industry. From startups to major enterprises, we are seeing accelerated interest in the versatility and capabilities of generative AI.”
Last month, NVDA became the sixth company to surpass the $1 trillion market capitalization. Its revenue and earnings in the first quarter beat Street estimates. Its revenue topped analyst estimates by 10.3%, while its earnings came 18.8% above the consensus estimate. The company reported record data center revenue of $4.28 billion during the first quarter.
NVDA is garnering investors’ interest due to its leadership and expertise in AI. Given the growing popularity of ChatGPT, the generative AI industry is expected to witness robust growth. NVDA is a leader in advanced AI chips required for generative AI. Apart from generative AI, there is a growing demand for accelerated computing.
The company’s graphic processing units (GPUs) are used in supercomputers, data centers, and drug development. Its GPUs are used as accelerators for central processing units (CPUs). Founder and CEO Jensen Huang said, “The computer industry is going through two simultaneous transitions – accelerated computing and generative AI.”
“A trillion dollars of installed global data center infrastructure will transition from general-purpose to accelerated computing as companies race to apply generative AI into every product, service, and business process,” he added.
NVDA is boosting the production of its entire data center range of products like H100, Grace CPU, Grace Hopper Superchip, NVLink, Quantum 400 InfiniBand, and BlueField-3 DPU to meet the rising demand for AI technology.
Melius Research analyst Ben Reitzes said that NVDA reminds him of Apple Inc. (AAPL). He said, “NVDA is the obvious flagship AI company, whose decisions over the last two decades have positioned it for long-term benefits.”
“With a full-stack approach that, in our experience, tends to deliver an outsized profit share in the industry for longer than expected once the ball starts rolling downhill due to developer support and becoming an industry standard,” he added. The analyst has a Buy rating on the stock with a price target of $625.
For the second quarter of fiscal 2024, NVDA’s revenue is expected to be $11 billion, plus or minus 2%. Its non-GAAP gross margins are expected to be 70%, plus or minus 50 basis points.
Here’s what could influence NVDA’s performance in the upcoming months:
Disappointing Financials
NVDA’s revenue for the first quarter ended April 30, 2023, declined 13% year-over-year to $7.19 billion. Its non-GAAP operating income fell 23% year-over-year to $3.05 billion. The company’s non-GAAP net income declined 21% over the prior-year quarter to $2.71 billion. In addition, its non-GAAP EPS came in at $1.09, representing a decline of 20% year-over-year.
Favorable Analyst Estimates
Analysts expect NVDA’s EPS for fiscal 2024 and 2025 to increase 136.9% and 35.6% year-over-year to $7.91 and $10.71. Its fiscal 2024 and 2025 revenue is expected to increase 60.9% and 27.8% year-over-year to $43.39 billion and $55.46 billion.
For the quarter ending July 31, 2023, NVDA’s EPS and revenue are expected to increase 305.8% and 65.1% year-over-year to $2.07 and $11.07 billion, respectively.
Stretched Valuation
In terms of forward EV/EBITDA, NVDA’s 58.50x is 298.3% higher than the 14.69x industry average. Likewise, its 25.35x forward EV/S is 752.6% higher than the 2.97x industry average. Its 56.39x forward non-GAAP P/E is 139.3% higher than the 23.56x industry average.
High Profitability
In terms of the trailing-12-month net income margin, NVDA’s 18.52% is 821% higher than the 2.01% industry average. Likewise, its 23.53% trailing-12-month EBITDA margin is 174.8% higher than the industry average of 8.57%. Furthermore, the stock’s 6.65% trailing-12-month Capex/Sales is 181.8% higher than the industry average of 2.36%.
Bottom Line
Given the vast generative AI and accelerated computing market, NVDA is in a sweet spot. Its earnings are expected to more than double this year, driven by rising chip sales for data centers and artificial intelligence. Demand for GPUs from gaming is also likely to recover this year.
Moreover, the company is well-positioned to benefit from the chip demand from autonomous cars, cryptocurrency mining, and adopting the metaverse.
However, given its stretched valuation, it could be wise to wait for a better entry point in the stock.
