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Artificial Intelligence (AI) has been arguably the most popular and at the same time, profitable investing theme in 2023, and the rally in AI stocks helped the Nasdaq Composite ($NASX) log its best first-half performance in four decades. While not a pure-play AI company like C3.ai (AI), Nvidia (NVDA) is among the biggest beneficiaries of the AI boom, as reflected in its latest earnings report as well as the stock's price movement.
With a YTD gain of over 230%, Nvidia is the best-performing S&P 500 index ($SPX) stock of the year by a fairly wide margin. Meta Platforms (META), which is the second-best-performing S&P stock this year, has rallied just 143% - and while the returns are astonishing, it nonetheless shows just how dramatically Nvidia has outperformed in 2023.
Nvidia Shattered Fiscal Q2 Earnings Estimates
Last week, Nvidia released its fiscal Q2 2024 earnings report - which was arguably the most widely followed event of the week, and even overshadowed Fed Chair Jerome Powell’s Jackson Hole speech.
Nvidia reported revenues of $13.51 billion for the quarter, more than double what it reported in the corresponding quarter last year. The metric easily surpassed the $11.22 billion that analysts were expecting, and was even higher than the most optimistic forecasts – and for context, it was almost twice the $7 billion that analysts were anticipating back in May, before the company provided its updated guidance.
The revenue outlook for the current quarter was also quite impressive, as Nvidia expects sales to rise 170% to $16 billion – again, well ahead of the $12.61 billion that analysts expected.
Nvidia’s fiscal Q2 earnings per share of $2.70 was also well ahead of the $2.09 that analysts expected, representing yet another spectacular quarterly earnings beat for the chip giant.
NVDA Stock Soared to a Record High After Earnings
After the earnings release, Nvidia stock soared to an all-time high and peaked north of $500. However, the stock could not hold on to that price level, and eventually closed with marginal gains.
This price action might seem quite intriguing, given the company's earnings, guidance, and management's commentary during the earnings call were all quite reassuring.
How High Can Nvidia Stock Rise?
Wall Street analysts went into overdrive to raise the stock’s target price after the earnings report. Rosenblatt raised its target to a new Street high of $1,100, which implies potential upside of almost 128% over current levels. Analyst Hans Mosemann said in the note, “Nvidia’s epic print and guide two quarters in a row is simply unprecedented and just getting started.” If Mosemann’s prediction comes to fruition, Nvidia’s market cap would surpass $2 trillion – a club that only has Apple (AAPL) and Microsoft (MSFT) as its current members.
Wall Street is overwhelmingly bullish on Nvidia, and none of the 35 analysts following the stock rate it as a Sell. It's quite rare for analysts to be so unanimously optimistic about a company, especially after the stock has risen three-fold in less than eight months.
That said, NVDA's valuation multiples are currently lower than they were heading into its fiscal Q1 2024 earnings release in May - which we know in hindsight sparked a mammoth rally, and soon catapulted Nvidia into the league of $1 trillion companies.
Nvidia’s next-12-months (NTM) price-to-earnings (PE) multiple is currently at 31.4x, which is not only a multi-month low, but similar to that of rival Advanced Micro Devices (AMD). And while it's not strictly comparable, despite falling margins, rising competition, and the electric vehicle (EV) price war, Tesla (TSLA) has an NTM PE multiple of over 61x.
NVDA Stock Forecast: Why the Rally Might Continue
I expect Nvidia stock to rally further from these levels amid the continued AI boom. Nvidia has a presence in multiple emerging and secular growth industries, and apart from generative AI, it is also a play on gaming and autonomous driving. While Nvidia’s Automotive business is pacing at an annual revenue run rate of just above $1 billion, the company believes that it could be a $300 billion market opportunity as autonomous driving gains traction.
Also, the company has an impeccable track record on execution, and has capitalized on emerging opportunities. Long term, the stock has created tremendous investor wealth over the last two decades; in aggregate, Nvidia stock has risen 12,601% in the last 10 years, and 30,831% in the last 20 years.
Key Risks Nvidia Investors Should Watch Out For
Meanwhile, even as the stars look well-aligned for Nvidia stock to rise even higher from these levels, it's worthwhile to know about some of the risks that the company faces.
While Nvidia believes that strong demand for its products will temper any business impact even if the U.S. further tightens restrictions on chip exports to China, the mainland’s importance to the company cannot be overstated, as China accounts for over one-fifth of its sales.
On the supply side, Nvidia is over-reliant on Taiwan - which is a risk, again, considering the geopolitical situation. Also, Nvidia might not have an AI dream run forever as competitors like AMD try to catch up, which could also lead to lower prices for the high-end Nvidia chips that are used for applications like generative AI.
While some of these risks might not be fully priced in NVDA stock, I believe the risk-reward nonetheless looks favorable. If you are a growth investor looking for a stock to practically hold for life, Nvidia fits the bill.
On the date of publication, Mohit Oberoi had a position in: NVDA , AAPL , META . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
