Nvidia Corporation (NASDAQ:NVDA) shares have recently reached new all-time highs, currently trading at over $540 with a market cap of $1.31 trillion.
Rally Resistance
Despite this surging success, there has been widespread skepticism surrounding Nvidia’s continued market rally. Critics compare it to the dot-com bubble, branding it unsustainable and irrational. However, history tells a more nuanced story.
Doubters fail to recognize that Nvidia has been a leading performer on the Nasdaq for over a decade. In the past year alone, NVDA shares surged by nearly 246%, and over the last 10 years, they saw a staggering increase of over 13,200%.
But what’s truly confounding is that despite these soaring gains, Nvidia shares are actually cheaper now than they have been for the majority of the last 20 years. This counterintuitive fact is a consequence of the company’s exceptional fundamental growth.
Nvidia’s rally, therefore, is not simply driven by blind greed but is backed by robust fundamentals and continuously improving financials.
Fundamental Value
The true essence of the bullish outlook lies in Nvidia’s valuation. Despite the 246% surge in share price last year, analysts anticipate a further 268% rise in EPS once Q4 results are revealed. This discrepancy, combined with the underestimation of future 12-month growth potential by the market, presents a compelling opportunity.
From a trailing twelve months (ttm) perspective, shares may seem pricey, with a P/E ratio in the 50-46x range. However, considering the projected EPS growth of ~270% last year and ~70% this year, these multiples align favorably with a PEG (price/earnings to growth) basis. Moreover, on a forward-looking basis, NVDA is trading for roughly 26.5x, making it a cheaper option compared to several other prominent growth and defensive stocks.
While it might sound absurd, paying 23x for a blue-chip defensive stock growing at 8%, when you could pay 26x for a blue-chip tech stock growing at 70%, is not rational. In light of this, the projected 70% growth for 2023 may even prove to be conservative.
NVIDIA’s Explosive Earnings Surpass Expectations
Coming into 2023, analysts completely underestimated NVDA’s potential.
Unprecedented Performance Defies Expectations
During the company’s first 3 earnings reports of 2023, NVDA absolutely blew expectations out of the water (and posted guidance that was billions of dollars above Wall Street’s sales and earnings expectations).
During the first quarter, NVDA beat on both the top and bottom lines, but these weren’t massive beats (for instance, the consensus EPS estimates coming into the quarter was $0.92 and NVDA posted $1.09 in earnings).
The guidance here is what caught the market off guard and sparked NVDA’s 2023 rally.
NVDA called for Q2 sales of ~$11b, which was roughly 50% above analyst consensus.
Companies post beat and raise quarters all of the time, but rarely have I seen the market so wrong about guidance from mega-cap companies like this.
That bullish guidance caused shares to jump by more than 25% in the afterhours trade.
Impressive Q2 Performance and Guidance
During the second quarter, NVDA posted EPS of $2.70, which was way about the consensus estimate of $2.09 coming into the print.
Sales came in ahead of that amazing Q1 guidance, $13.51b. By then, the analyst consensus had caught up to NVDA’s Q1 guidance at $11.22b. However, it turns out that the Q1 number was a low bar for the company. Its $2b+ beat represented y/y revenue growth in the triple digits (and 88% on a sequential basis).
And, most impressive of all, NVDA’s Q2 net income jumped from $656m to $6.19b (on a y/y basis).
Q2 is when NVDA’s CEO, Jensen Huang, mentioned that the transition from existing data center infrastructure to data centers capable of generative AI is a trillion dollar opportunity.
That’s trillion, with a T. And this statement caught the market’s attention in a big way and kept the sentiment surrounding shares positive.
Growth Continues Unabated in Q3
During Q3, EPS came in at $4.02 (above consensus estimates of $3.37).
NVDA’s sales totaled $18.1b, tripling the $5.9b that it posted a year prior.
What I found most interesting about the quarter is that not only did NVDA post 206% sales growth, but its gross margin expanded from 53.9% to 74.0%.
Honestly, I don’t think I’ve ever seen anything like this.
Untapped Potential Suggests Further Growth
The most common complaint that I see from the bears about NVDA’s valuation is that this growth isn’t sustainable.
Obviously, that’s the case.
If you place the same blended P/E multiple on NVDA’s fiscal 2025 expectations (for reference, those are this year’s earnings; NVDA is currently in Q1FY2025) that the market placed on its earnings during the first and second quarters of 2023, then we’re talking about a $1000.00 share price.
The ~50x multiple that shares traded with then is is-line with the 5-year average, adding a bit of credence to the idea that NVDA shares could rise to the 4-digit territory in the relatively near future.
Now, I don’t think that’s likely. I don’t think NVDA should trade for 50x earnings because the level of growth that I expect to see in 2024 isn’t sustainable. But, I think a ~35x multiple is more than fair when we’re talking about the high margin sale that NVDA is expected to generate.
I’ve highlighted the 35x level in the chart above. As you can see, it’s represented pretty strong support for shares during recent selloffs.
Therefore, I think this is a pretty conservative target, and with it in mind, I wouldn’t be surprised to see shares trade in the $700+ range by the end of the year (35 x $20.44 = $715.40).
That’s using a 35x multiple on the current consensus in the $20.50 range. In a year or so, with the benefit of hindsight, I wouldn’t be surprised if that EPS estimate is too low.
NVDA has beaten Wall Street consensus EPS estimates during 18 out of the last 20 quarters. I wouldn’t be surprised if that trend continues here and, therefore, I don’t think it’s crazy to say that NVDA could generate earnings in the $21-$22 range this year.
A 35x multiple on $21.50 of earnings is ~$750.
That represents ~40% upside from here (even after the stock’s nearly 10% year-to-date rally).
The failure to recognize that NVDA’s fundamental growth has outpaced its share price performance over the last year or so is why there are so many people sitting on the sidelines here, pouting about NVDA’s rally.
Bears who are calling for a massive selloff here, simply because of the stock’s rapid acceleration higher, are being irrational. They’re being emotional. And they’re not paying attention to the numbers.
Resentment isn’t going to lead to riches. Now’s the time to reexamine NVDA’s income statements and realize that winning the AI race has turned NVDA into one of the world’s largest cash cows.
Unveiling Nvidia’s Investment Potential: A Deep Look Into The Future
Those who have been eyeing Nvidia for investment opportunities are about to find themselves at a crossroads. With projected fiscal 2025 growth rates of around 70% and hefty expectations for the years to come, some may be inclined to assume that this remarkable growth spurt is unsustainable. But it’s time to reassess your trepidations around the long-term growth potential of this tech giant.
The Road Ahead: A Case for Sustainable Growth
Let’s clear the air. Nvidia’s soaring growth projections may seem unsustainable, but all signs point to the contrary. From a staunch belief in current consensus validating prevailing stock prices to a forward price-to-earnings ratio gradually dwindling due to continued EPS expansion, there is a compelling case for sustained growth and a logical justification for the current share price.
While it’s natural to be cautious about making projections too far into the future, bear in mind that Wall Street analysts aren’t prepared to write off Nvidia’s growth story just yet. Fiscal 2026 EPS estimates, as per Seeking Alpha data, demonstrate a consensus of $24.01, indicating an impressive 20% growth, coupled with 2025’s substantial expectations. At $540 per share, Nvidia is trading for a modest 22 times the consensus 24 months ahead—a comforting sign for long-term shareholders.
Envisioning a future beyond the current financial year may sound daunting, but placing a 1.5x price/earnings to growth (PEG) ratio on the stock in the next few years predicts a 30x multiple on $24 in earnings, equating to a $720 share price. It’s a conservative PEG multiple given the anticipated robust performance, aligning with the existing P/E target and indicating substantial upside potential from current all-time highs.
AI: Galloping Stronger Than Ever
“Generative AI is the single most significant platform transition in computing history. In the last 40 years, nothing has been this big. It’s bigger than PC, it’s bigger than mobile, and it’s gonna be bigger than the internet, by far.”
Venturing into artificial intelligence (AI), Nvidia’s CEO Jensen Huang’s bold proclamation at Microsoft’s Ignite event unleashes a mind-boggling revelation. Embracing the transition to generative AI as a transformative watershed eclipsing previous computing breakthroughs, he presents a riveting peek into a future more profound than the present.
AI’s potential to revolutionize life on an unprecedented scale comes into sight as Nvidia charts its course in AI-driven advancements. From MIT’s breakthrough in discovering new antibiotics through AI to addressing concerns about antibiotic resistance, it is evident that AI holds the key to transformative breakthroughs poised to shape the future.
Nvidia’s foresight, led by visionary CEO Huang, positions the company at the vanguard of robust secular growth trends. The formidable lead in data center technology, coupled with its prowess in the AI arena, augurs well for tapping into a colossal addressable market.
Yet, competitive threats lurk on the horizon, with emerging AI chips and open-source platforms posing potential challenges. However, the resilience demonstrated by Nvidia throughout its history, coupled with the anticipated strong growth in the years to come, underscores a compelling case for continued success.
Solidifying the Position: Countering the Bearish Perceptions
Dispelling skepticism, Bank of America analyst Vivek Arya’s optimistic projection of Nvidia generating $100 billion in incremental free cash flow over the next two years serves as a potent armor against competitive threats. Bolstered by a substantial war chest, Nvidia is poised to maintain its competitive edge, a testament to its potential in fending off challengers.
The embrace of prudent cash flows allocation, robust R&D, and strategic acquisitions reinforces Nvidia’s moat, further cementing its position. With an eye on enhancing shareholder returns through buybacks, the potential to propel EPS growth presents an additional dimension of financial maneuvering that underlines the company’s astuteness.
The Seemingly Unbeatable Case: A Call to Embrace the Prospects
Amidst the fervent bullish sentiment, it isn’t just Vivek and his enthusiasm resonating. Yahoo Finance reflects the upbeat mood with over 50 analysts echoing a positive chorus, projecting an average price target of $636, representing an 18% upward potential. With 33 “Buy” ratings and 18 “Strong Buy” ratings amidst Wall Street, the tone is resoundingly optimistic.
Given this compelling tapestry of projections, a pertinent question emerges for the naysayers. Is it rational to dismiss the consensus of seasoned professionals and the institutions they represent? Isn’t it time to temper skepticism and acknowledge Nvidia’s standing as a blue-chip gem, poised for remarkable growth, and presently available at an attractive valuation?
Nvidia has played an instrumental role in my personal financial journey and holds promise for ample wealth generation. With an eye on realizing aspirations and financial goals, Nvidia remains a force to reckon with in the investment landscape. As the winds of change continue to sweep through the tech domain, embracing Nvidia’s potential may well pave the way for realizing future financial prosperity.
The comment section eagerly awaits your insights and outlook for the stock. Here’s to propitious ventures for all!
