How Much Upside Is Left in NVIDIA (NVDA)?

Semiconductor powerhouse NVIDIA Corporation (NVDA) delivered extraordinary quarterly figures last month, surpassing its revenue guidance and analysts’ projections. The firm’s revenues tripled to $18.12 billion, and net income soared 13.6 times to $9.24 billion. Its non-GAAP EPS of $4.02 comfortably exceeded estimates, registering a 6.9x year-over-year surge.

Due to an early commitment to AI, NVDA has positioned itself as an undisputed market leader in the AI semiconductor industry. It has effectively positioned the company years ahead of its competitors, offering an all-encompassing platform that represents a holistic solution for all AI demands, from chips and processors to intricate software systems.

In its latest earnings cycle, NVDA’s persistent dominance in the AI chips marketplace was notable, demonstrated by Data Center revenues increasing 278.7% year-on-year to $14.51 billion. The company maintained robust non-GAAP gross margins at 75%, resulting in a 380 basis points rise quarter-over-quarter.

Amid mounting competition from rivals boosting their AI capabilities, NVDA owns a remarkable 80% share of the AI chip market. The company's foresight to invest heavily in AI innovation years ahead of others now positions the company to capitalize on the industry’s exponential growth.

Furthermore, NVIDIA continues to spark innovations in the competitive AI scene, as evidenced by the development of GH200, the next iteration of Grace Hopper Superchip. Notably, the Santa Clara-based chipmaker also reported significant growth in the networking business, bolstered by advancements in InfiniBand technology.

Given the exceptional third-quarter performance, there is little surprise over Wall Street's widespread upward revision in the revenue and EPS estimates. Analysts expect NVDA’s EPS for the fiscal year ending January 2025 to reach as high as $19.72 from the $12.30 expected in fiscal 2024 (ending January 2024).

For the fiscal year ending January 2024, NVDA’s revenue is expected to reach $58.86 billion, up 118.2% year-over-year, while for the fiscal year 2025, analysts expect its revenue to reach $89.70 billion. For the fourth quarter, the company expects its revenue to be $20 billion, plus or minus 2%.

NVDA responded to all the widespread speculation regarding its potential to deliver impressive results, prompting analysts to revise their already lofty price targets upward. Goldman Sachs’ analyst Toshiya Hari increased the price target to $625 due to robust demand and an improving chip supply chain.

JPMorgan’s analyst Harlan Sur hiked the target to $650, citing the “massive demand pull” for NVDA’s data center products, while Morgan Stanley’s Joseph Moore forecasts a price target of $603 due to anticipated reduced supply chain lead times next year.

Bank of America and Bernstein analysts upgraded their price expectation to $700 because of the expected rise in AI adoption, which they believe will counterbalance regulatory challenges associated with China. Wall Street analysts expect the stock to reach $661 in the next 12 months, indicating a potential upside of 42%. The price target ranges from a low of $560 to a high of $1,100.

Nevertheless, after earnings and optimistic projections were released, NVDA stock experienced a dip, correlating with a moderate rise in market skepticism. This downward movement can be attributed to concerns about the company’s sustained dominance amid challenges like the potential impact of President Joe Biden’s administration's advancement of a chip export ban to China. Management indicated that this policy decision could have detrimental effects on NVDA.

The U.S. chipmaker faces a risk of a setback worth $5 billion due to the export ban. These orders were placed for 2024 by leading Chinese tech giants, including Alibaba, ByteDance, and Baidu. If the U.S. government fails to issue the necessary delivery licenses, NVDA may have to forgo these lucrative contracts.

Moreover, there are broader concerns about the extent to which speculative investment can continue to propel NVDA stock. With a year-to-date gain of more than 218%, NVDA easily takes the lead as the most aggressive-performing stock in the S&P 500.

Bottom Line

NVDA secured a distinguished position in the $1 trillion club this year following an impressive surge in its revenue guidance, mainly due to the substantial order volume from the burgeoning generative AI industry. This achievement is particularly noteworthy given the company's size.

The substantial rise in the company's valuation is primarily attributed to significant interest in NVIDIA's advanced chip technology, which is currently experiencing increased demand because of a mounting focus on AI and ML capabilities across various sectors.

Despite a slump in its price, the trading volume of NVIDIA's shares skyrocketed to 86 million on November 21, compared to a daily average of 26 million, indicating a heightened interest in the stock.

Investors are unlikely to buy the stock solely for its $0.04 per share quarterly dividend, particularly given that the stock recently surpassed the $500 benchmark and currently trades at over $450 per share. Thus, it can be reasoned that investors acquiring the stock at these elevated levels assume the stock has further upsides left.

Undeniably, NVDA's robust growth is commendable, and management continues to uphold a confident picture of the company's future. However, the firm is not without risk. For instance, questions arise over the impact the AI bubble pop could have on chip prices and, consequently, profit margins.

Moreover, with NVDA's shares trading at 19.5x sales and 38x earnings, any stumble can impact the stock significantly. Considering the current market volatility, associated headwinds, and lackluster price momentum, it may be prudent to wait for a better entry point in the stock.