In the realm of investment, conventional laws often seem irrelevant. Stocks, unlike earthly objects, defy gravity; their ascent doesn’t necessarily lead to a descent, at least not in the foreseeable future. This axiom holds particularly true for sectors captivating the investor psyche, such as artificial intelligence (AI).
At the forefront of the AI boom stands Nvidia (NASDAQ:NVDA), a semiconductor designer witnessing an unparalleled surge in its stock value since the onset of 2023. As anticipation builds for its upcoming earnings report, let’s delve into Nvidia to discern whether anything can impede its relentless progress.
Why Nvidia Stock Appears Rationally Priced at Present
Here’s a puzzling inquiry: Can a stock still be deemed reasonably priced after soaring by 220% in the past year? That’s precisely the feat Nvidia has accomplished, surpassing giants like Alphabet (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN) to secure the third spot among U.S.-listed companies, boasting a staggering market capitalization of $1.825 trillion.
Even amidst this extraordinary surge, there’s a case to argue for Nvidia’s reasonable valuation. Despite the meteoric rise, with earnings estimates trailing closely behind, the stock currently trades at a modest 35 times this year’s projected earnings. This valuation appears restrained for a company experiencing a two-year growth explosion, poised to quadruple its revenue.
The momentum coursing through Nvidia’s business is undeniable. In its latest quarter, revenue skyrocketed by 206% year-on-year to a staggering $18.1 billion. Demand surged, propelled by generative AI and investments in large language models (LLMs), with data center revenue surging by 279%, buoyed by increasing adoption of Nvidia’s Hopper-GPUs among cloud providers. Compute revenue witnessed a staggering 324% leap, while its InfiniBand solution for high-performance computing registered a robust 155% rise in revenues.
Capitalizing on its status as a capital-light semiconductor designer, outsourcing manufacturing to Taiwan Semiconductor Manufacturing (NYSE:TSM), Nvidia boasted an impressive operating margin of 57%, fueling a remarkable 1,259% year-over-year surge in operating profit to $10.4 billion.
A commonly employed metric to assess growth stocks is the price/earnings growth (PEG) ratio, which juxtaposes the P/E ratio with the growth rate over a specific period. Currently, Nvidia shares boast a five-year forward PEG ratio of just 0.71 according to FactSet, presenting a cheaper alternative compared to tech counterparts like Apple (NASDAQ:AAPL).
Much like Apple, Nvidia enjoys a competitive advantage stemming from its robust brand and software ecosystem. Its proprietary software, CUDA, launched in 2007, facilitates general-purpose computing leveraging GPUs, establishing itself as a pivotal platform in AI computing. The acquisition of Mellanox Technologies in 2020 furnished Nvidia with essential cabling technology, complementing CUDA and offering a comprehensive AI solution for businesses.
The Road Ahead for Nvidia Stock
However, Nvidia is not immune to risks. While the perpetual need for AI model training bodes well for its GPU demand, the proliferation of smaller AI models and inferencing tasks could divert spending toward alternative chip types.
To sustain its growth trajectory, Nvidia’s AI enterprise software must exhibit tangible productivity enhancements in workplaces. If realized, this could perpetuate the scramble for Nvidia’s hardware well into 2024 and beyond.
Projections anticipate a gross margin ranging between 73% to 74% from fiscal year 2024 to fiscal year 2026, a significant expansion from the 59% witnessed in fiscal year 2023. Leveraging its margin profile and scalable business model, Nvidia is poised to unlock substantial free cash flow potential, estimated to reach $45 billion in fiscal year 2025 and $55 billion in fiscal year 2026, dwarfing the $5 billion generated in fiscal year 2023.
With an expanding software repertoire, Nvidia is positioned to capture a larger slice of the AI pie, even if its share of chip sales diminishes.
In a world racing to establish a new AI computing infrastructure, thwarting the momentum of Nvidia’s stock appears challenging. Seizing opportunities amidst any market weakness, purchasing Nvidia stock under $750 seems prudent.
Featured Image: Freepik
Author Faith Yakubu 
