HomeMost PopularNvidia: Stanley Druckenmiller's Insight on AI Validates Rating Upgrade

Nvidia: Stanley Druckenmiller’s Insight on AI Validates Rating Upgrade

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The recent volatility of Nvidia Corporation (NASDAQ: NVDA) in the stock market may have some investors cautious, but we believe this pullback is merely temporary. In fact, we expect Nvidia to outperform the S&P 500 (SP500) by a significant margin in the coming years.

Renowned hedge fund manager Stanley Druckenmiller, who has consistently achieved impressive returns for 30 years in a row, shares our optimism. He holds Nvidia as his largest publicly held position, citing the company’s dominance with CUDA, the shift towards accelerated computing in data centers, and the current earnings estimates based on Nvidia’s limited supply. According to Druckenmiller, this presents a buying opportunity with a long-term investment horizon of at least 2-3 years.

Since our initial “Buy” rating last November, Nvidia’s stock has soared by an impressive 192.71% compared to the S&P 500’s modest 8.64% gain. Given these exceptional results, we have decided to upgrade Nvidia to a “Strong Buy” rating.

AI In A Recession

Investors may be skeptical about investing in fast-growing stocks amid the possibility of a recession. However, we believe Nvidia’s prospects are different due to its high demand for H100 GPUs, even in the face of economic uncertainty. Additionally, the company’s revenue growth is supported by blue-chip companies with significant capital expenditure budgets and cash reserves, which expect a lower growth profile in the coming quarters.

Druckenmiller echoes this sentiment, expressing his optimism about artificial intelligence (AI) despite his belief that a recession is likely. His portfolio is heavily invested in AI stocks, with Nvidia being his largest position. He argues that AI is a transformative technology that can have a magnitude similar to the internet. If staple companies can increase prices during a recession, there’s no reason why Nvidia, with a potential 70% increase in orders and earnings during a hard landing, can’t thrive.

Looking at Nvidia’s earnings projections, the company’s EPS is expected to grow from $3.34 for the full year 2022 to $10.82 in 2023. This rapid growth is a testament to Nvidia’s ability to defy sluggish earnings trends and thrive in a potentially recessionary environment.

Not As Expensive As It Seems

Some investors may perceive Nvidia as expensive considering its current market cap of $1.16 trillion and a P/E ratio of 105.34. However, when future earnings estimates are taken into account, Nvidia appears much more reasonably priced.

For the next quarter, Nvidia is expected to report earnings per share of $3.35. On an annualized basis, this equates to $13.4, resulting in a quarterly P/E ratio of 35.03. Compared to other large companies such as Apple, which is trading at a forward P/E ratio of 29.58x, Nvidia’s valuation becomes even more appealing.

Furthermore, Nvidia’s forward earnings growth expectations indicate that the stock is undervalued. With projected EPS of $25 in fiscal year 2025 and a forward multiple of 35x, the stock could reach $875. Given Nvidia’s double-digit earnings growth forecast, a 30-35x multiple seems conservative compared to other large-cap companies.

Why “CUDA”?

While some investors worry about competition in the market, Nvidia’s moat with CUDA provides protection against potential challengers. CUDA remains the gold standard for parallel computing, and its extensive ecosystem and user base make it difficult for competitors to catch up.

Investors should ask themselves why everyone is using CUDA instead of cheaper alternatives. The answer lies in its ease of use, widespread adoption, and compatibility. CUDA has been instrumental in numerous advancements in the field of AI, making it irreplaceable for researchers and developers.

In essence, Nvidia’s moat with CUDA is similar to Apple’s iOS and Microsoft’s Windows in terms of ecosystem loyalty and compatibility. Switching from CUDA to alternative platforms would require significant effort and time, deterring researchers and developers from making the switch.

The Bottom Line

In conclusion, we believe that Nvidia’s future looks bright. Our upgraded “Strong Buy” rating is further validated by Stanley Druckenmiller’s position in the company. While short-term volatility may persist, we see Nvidia as a long-term investment opportunity for at least the next 2-3 years. The company’s dominance with CUDA, strong demand for accelerated computing, and impressive earnings growth projections make Nvidia an attractive prospect for investors.

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