NVIDIA Corporation (NASDAQ:NVDA) has outperformed its competitors and the market in terms of year-to-date price return. Bullish momentum became more aggressive during the Q1 2024 earnings call, which was nicknamed “the iPhone Moment” of Artificial Intelligence (AI).
For short-term bullish momentum, AI-oriented items and market attitude (toward AI) have already been factored into NVIDIA stock price in 2023. In today’s analysis, however, we examine NVIDIA’s stock price in the near run as the AI hype fades and there is a lack of fundamental support.
The Transformative Impact
It is necessary to discuss ChatGPT’s transformative influence and role in the transition from large language models (LLMs) to a more dense chatbot-based technology. Many technologies, such as guardrails, reinforcement learning, and knowledge vector databases, have been used to help ChatGPT reach its full potential.
NVIDIA, the principal supplier of the underlying technology, describes this convergence as the “iPhone moment,” in which all of the necessary components come together to create an exceptional and competent solution. On the Q1 2024 call, NVIDIA emphasized that it was already fully producing its Ampere and Hopper architectures, demonstrating its readiness to capitalize on the emerging opportunities resulting from this disruptive breakthrough.
NVIDIA’s first-quarter results, in particular, revealed significant increase in the data center sector, fuelled by rising demand for accelerated processing platforms in generative AI applications. NVIDIA’s Hopper and Ampere architecture GPUs were embraced by cloud service providers, consumer internet companies, and organizations, resulting in record income for the company. Collaborations with important cloud providers, as well as the release of the DGX H100 and DGX Cloud, have expanded NVIDIA’s market reach.
Furthermore, the introduction of NVIDIA AI Foundations allows its clients to design and execute custom LLMs and generative AI models tailored to their individual needs. NVIDIA saw strong demand in the gaming area, which was boosted by the introduction of the 40 Series GeForce RTX GPUs, notably in laptops. The company’s focus on AI-powered gaming experiences, collaboration with Microsoft (NASDAQ:MSFT) for Windows PC gaming, and expansion of the GeForce NOW gaming service position it well for future growth.
Furthermore, Pro visualization sales increased sequentially due to increased demand for workstations in the public, healthcare, and automotive sectors. NVIDIA’s Ada Lovelace GPU architecture and the introduction of generative AI capabilities into its workstation products are expected to drive further growth. Omniverse Cloud and Fully Managed Service, announced alongside Microsoft Azure, provide a complete platform for planning, creating, deploying, and managing industrial metaverse applications. Furthermore, its automotive segment grew year over year, thanks to the NVIDIA DRIVE Orin platform and other agreements.
Notably, NVIDIA wants to increase its investments while maintaining operating leverage. Its expansion is aided by its high gross margins, which are fueled by higher-valued items and software integration. NVIDIA expects total revenue of $11 billion in the second quarter of fiscal ’24, thanks mostly to increased demand for generative AI and LLMs in the data center segment. To meet client demand, the company has secured significant supply for the year’s second half, extending data center demand visibility by a few quarters.
Furthermore, NVIDIA sees significant growth in generative AI workload training and inference, with accelerated computing being the data center’s future. The business hopes to reduce the cost per question while also enabling wider adoption across a variety of devices and platforms. NVIDIA is working on pretreatment and postprocessing in the inference process, with the goal of offering critical capabilities via cooperation with cloud service providers and AI Enterprise solutions.
Competition remains a hurdle, but NVIDIA’s low-cost and low-total-cost-of-ownership solution, comprehensive stack optimization, and holistic approach give it a clear advantage over competitors. Furthermore, NVIDIA differentiates itself from competition due to its high utilization, scalability, and expertise in data centers and software.
NVIDIA is well placed to gain from the shifts to accelerated computing and generative AI. The company predicts that most data centers will embrace accelerated computing, and it intends to meet demand with new products such as the H100, Grace, and Grace Hopper Superchips, as well as the BlueField-3 and Spectrum-4 networking platforms. By providing energy-efficient and sustainable data center-scale computing, these services will continue to boost NVIDIA’s revenue and profitability.
Beyond that, NVIDIA’s profitability and valuation must be evaluated to see if all of the projected efficiency in the AI transition translates into any positive boost in financial performance and valuation.
Profitability and Estimation
Because of NVIDIA’s industrial performance, investors have been too anxious about the business during the current AI hype cycle. NVIDIA, on the other hand, provides foundational technologies to assist AI use cases and industrial applications built by its clients. As a leading AI technology supplier, its income and profitability are directly related to client demand for its products and services.
EPS projections remain too optimistic.
The street anticipates substantial earnings per share growth in the coming quarters. NVIDIA is not a lone player in the industrial ecosystem. If economic conditions do not improve as expected, NVIDIA may be unable to surprise its clients with an EPS increase. Any little profits shortfall could cause the company’s market value to plummet. The changes to earnings per share are 41.92% higher than NVIDIA’s 5-year average and 75% higher than the sector median. Given the current macroenvironment, this assumption is unduly optimistic.
Profitability is still under attack.
The Net Income Margin (TTM) of NVIDIA is 18.52%, which is 35.51% lower than the company’s 5-year average of 28.72%. Similarly, the Return on Total Capital (TTM) is 7.52%, which is -55.53% lower than the five-year average of 16.90% for the company. The Return on Equity Growth (Forward) assumes a low rate of 1.73%.
Several factors contributed to the share price drop in early 2022, including supply chain concerns in the semiconductor business, increased gaming inventories with retailers, an unsustainable pricing plan, and cryptocurrency mining difficulties. As a result of the profitability levels, investors jumped on NVIDIA before its profitability levels rose to the surface, displaying a genuine long-term rise in margins and returns.
In valuation, there is no margin of safety.
Similarly, valuation multiples do not sustain NVIDIA’s stock price. Its P/E Non-GAAP (TTM) ratio is 137.94, which is 667.59% greater than the industry median of 17.97 and 175.49% greater than the company’s 5-year average of 50.07. It suggests that the AI hype is benefiting NVIDIA more aggressively than the industry as a whole.
P/E Non-GAAP (Forward) is 54.29, which returns to normal valuations from current P/E levels based on aggressive earnings estimates, or the stock price will decrease if earnings do not expand at the projected rate. The industry gets overvalued when the P/E Non-GAAP (Forward) ratio exceeds 22.14. These valuation multiples indicate a downward trend in NVIDIA’s forward value relative to the sector.
Technically, the stock price chart of NVIDIA displays a bearish divergence with a higher high price level and lower high RSI levels over 70. During the climax in November 2021, the same pattern was observed. It foreshadows a significant drop in the stock price (of the ongoing AI boom) in the coming weeks.
NVIDIA Stock Is OverPriced
To summarize, while NVDA has seen significant gains as a result of the AI hype, there are grounds to be concerned. The AI component has already been accounted for in the stock’s valuation, and the lack of fundamental support calls into question the stock’s long-term survival. Profitability metrics have fallen, and valuation multiples no longer justify the company’s exorbitant stock price. Technical indicators also point to a likely short-term downturn. Finally, given the current market uncertainty, the AI hype may not be enough to keep NVIDIA stock price stable in the long run.
Featured Image: Unsplash © Alireza Khatami
