The outlook for NVIDIA (NASDAQ:NVDA) for the next fiscal year is the main topic of this article. NVIDIA will have faster top-line and positive bottom-line growth in the next year, and the share price of NVIDIA has a lot of room to go up. This is why I think you should buy NVIDIA stock.
Key Numbers to Know
The key numbers for NVIDIA Corporation, such as its recent Q3 FY 2023 revenue and forward-looking top-line guidance for Q4 FY 2023, were satisfactory and mostly in line with what the market expected.
According to NVDA’s press release on its Q3 FY 2023 financial results, the company made $5,931 million in the most recent quarter. This is a -12% drop from the previous quarter. In particular, a 1% quarter-over-quarter increase in sales from the data centre market was more than cancelled out by a -23% QoQ drop in sales from the gaming market. Still, NVIDIA’s actual revenue for the third quarter was +2% higher than the market’s consensus estimate of $5.82 billion.
As part of its earnings report for the third quarter, NVIDIA gave a midpoint revenue forecast of $6 billion for the fourth quarter of fiscal year 2023. This means that NVIDIA’s top line will go up by 1% quarter-over-quarter and down by 21% year-over-year in the last quarter of the current fiscal year. More importantly, the company’s top-line guidance for the fourth quarter was only slightly (-1%, according to data from S&P Capital IQ) lower than what analysts had predicted as a whole before the most recent quarterly report.
Two weeks after NVIDIA announced its Q3 FY 2023 financial results on November 16, 2022, its shares did better than the S&P 500’s (+1.7%). This supports my belief that the company’s top line and revenue guidance for the third and fourth quarters were better than investors expected.
What Are the Catalysts to Watch For?
Investors will be looking for things that could cause NVIDIA’s shares to change prices in the future. In this section, I list a few things that could cause NVIDIA Corporation’s rating to change in the next fiscal year.
The first thing that could be a catalyst is when the gaming segment starts making money again, and channel inventories return to normal. Two quarters in a row, between Q2 FY 2023 and Q3 FY 2023, sales in NVIDIA’s gaming segment went down, but there are signs that things are improving.
The gaming division of NVIDIA could have done better in Q3 FY 2023, but it did better than the market expected. In the most recent quarter, NVIDIA’s gaming segment revenue dropped 23% from the previous quarter and 51% from the prior year to $1,574 million. According to data from S&P Capital IQ, the sell-side expected the company’s gaming segment to drop by 30% and 56% from the previous quarter and year, respectively.
NVIDIA also said in its Q3 FY 2023 earnings call that “channel inventories (for the gaming segment) are on track to approach normal levels as we exit Q4 (of fiscal 2023).” NVIDIA also said, “We expect to resume sequential growth (in Q4 FY 2023) with our (gaming) revenue still falling short of end demand as we work through the channel inventory correction.”
The second thing that could help is if NVIDIA’s strategy for selling alternative products to Chinese data centres keeps working well.
The data centre segment of NVIDIA’s business grew by 31% year over year and 1% quarter over quarter in the most recent quarter. Based on data from S&P Capital IQ, this was better than the +27% YoY and -2% QoQ growth that analysts expected for the top line of the data centre segment as a whole.
On August 31, 2022, NVIDIA said that the US government had “imposed a new licence requirement, effective immediately, for any future export to China” for its “A100 and upcoming H100 integrated circuits.” Wall Street analysts were worried about NVDA’s Q3 FY 2023 data centre segment performance because they thought new restrictions on Chinese clients would cause a significant drop in NVDA’s data centre revenue.
But NVIDIA has found a way around the new rules set by the US government. NVDA said during its recent third-quarter investor call that it has been “offering alternative products to data centre customers in China.” One of these products is the new “A800,” which the company says “meets the clear tests for export control set by the US government.”
As long as Chinese customers are willing to buy the new A800 instead of the A100 and export restrictions don’t change, NVIDIA’s data centre segment should be able to keep growing, which will be good for the stock and give it another boost.
The third possible catalyst is continuing to buy back shares.
NVIDIA Corporation said during its Q3 FY 2023 earnings call that it has “$8.3 billion left under our share repurchase authorization through December 2023.” NVIDIA already spent more than $9 billion on buying back its shares in the first nine months of fiscal year 2023.
Continued share buybacks will increase NVDA’s future earnings per share and send a message about how management thinks NVIDIA’s stock is undervalued.
In the next section, I will talk about NVIDIA Corporation’s financial situation for the next year.
What Do You Think Will Happen in 2023?
NVIDIA is expected to have much better financial results in the calendar year 2023 or the fiscal year 2024. (Feb. 1, 2023, through Jan. 31, 2024).
Sell-side consensus financial figures from S&P Capital IQ show that NVIDIA Corporation’s revenue growth will increase from 0.1% in fiscal 2023 to 11.4% in fiscal 2024. Analysts also think that NVIDIA will improve from a -26.4% drop in non-GAAP adjusted earnings per share in FY 2023 to a +33.8% rise in normalized EPS in FY 2024.
In the last section, I talked about how the gaming segment could turn around as channel inventory clearance nears its end. This is expected to be the most significant growth driver and catalyst for NVIDIA in 2023. NVIDIA’s earnings will grow next year because it will continue to buy back its shares and because its strategy of selling alternative products to Chinese data centre clients will continue to work.
In a nutshell, NVIDIA should speed up growth on the top line and return to positive growth on the bottom line in 2023/2024.
What Do Experts Say About NVIDIA?
Wall Street analysts think NVIDIA’s stock could go up by 29% based on the sell-consensus side’s target price of $203.63.
According to data from S&P Capital IQ, NVDA’s average price target of $203.63 is equal to a consensus forward normalized P/E multiple of about 36.3 times for fiscal year 2025.
I don’t think that NVIDIA’s goal of having a P/E multiple in the middle 30s is too high. So, I believe the analysts’ estimates for NVIDIA’s target price and how much it could go up in value are reasonable.
Is it Better to Buy NVIDIA Stock, Sell it, or Keep it?
My advice for NVIDIA stock is still to Buy. Based on its financial outlook for the calendar year 2023/fiscal year 2024 and its upside potential, as shown by the consensus price target, NVIDIA’s stock is undervalued.
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