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Semiconductor giant NVIDIA (NVDA) has been among the top-performing tech stocks globally in recent years. It has returned 8,550% in the last ten years and is up a whopping 25,000% since April 2003. Valued at a market cap of $666 billion, NVDA stock has already surged 85% year-to-date.
So, let’s see if NVIDIA stock can reclaim its 12-month high of $281.10 by the end of 2023.
The bull case for NVIDIA
NVIDIA has successfully developed game-changing products over the years, allowing the company to disrupt multiple markets. For example, it invented the GPU (graphics processing unit) in 1999, which sparked the growth of the personal computer (PC) gaming vertical while revolutionizing parallel computing. NVIDIA continues to expand its portfolio of products for rapidly expanding markets that include data centers, automotive, professional visualization, and artificial intelligence.
For instance, NVIDIA just released NeMo Guardrails, a product that enables applications powered by LLMs or large language models to provide accurate information while securing user privacy. LLMs such as ChatGPT are gaining rapid traction across industries and are used to summarize reports, develop marketing campaigns, and even accelerate drug design.
NVIDIA’s GPUs are also the backbone of a slew of AI-powered applications as it helps these platforms process large amounts of data. Microsoft (MSFT), which has a minority (49%) stake in OpenAI, recently disclosed it had to integrate various NVIDIA data centers to ensure the smooth processing of workloads for the optimal functioning of ChatGPT.
Basically, NVIDIA’s computing platform can solve complex problems efficiently and at a low cost compared to alternative computational approaches. Moreover, it aims to provide an end-to-end platform in verticals such as deep learning and machine learning, including GPUs, algorithms, libraries, and related software.
The demand for NVIDIA’s GPUs is well poised to accelerate in the upcoming decade, given the artificial intelligence market is forecast to surpass $1.75 trillion by 2030, compared to just $142 billion in 2022, according to a report from Statista.
NVIDIA is a major player in the AI space and continues to power expansion in the cloud computing market. Several cloud giants use NVIDIA GPUs to process data allowing the company to drive sales significantly higher. NVIDIA ‘s data center revenue grew 11% year over year to $3.6 billion in the most recent quarter, accounting for 60% of total sales.
NVIDIA has increased sales from $10.9 billion in fiscal 2020 to $26.9 billion in fiscal 2023 (ended in January). Its operating income doubled from $2.84 billion to $5.57 billion in this period, indicating a margin of 21%.
The bear case for NVIDIA
While NVIDIA has delivered market-thumping returns to investors, its revenue growth was flat year over year in fiscal 2023. Additionally, its operating and adjusted net income fell by 29% and 26%, respectively, as operational costs were up 31% compared to the year-ago period. A sluggish macro economy primarily driven by elevated inflation levels, rising interest rates, and supply chain disruptions led to lower enterprise spending in fiscal 2023.
While data center sales grew by 41% to $15 billion in fiscal 2023, its gaming and professional visualization segments saw revenue fall by 27% each in the last four quarters. Analysts now expect sales to rise by 11.5% to $30 billion in fiscal 2024 and by 24.4% to $37.4 billion in fiscal 2025. Comparatively, its adjusted earnings are forecast to expand from $3.34 per share in fiscal 2023 to $4.53 in 2024 and $6.05 in 2025.
So, NVDA stock is priced at 22.2x forward sales, and 60x forward earnings, which is steep given the macroeconomy is quite challenging. NVIDIA ended fiscal 2023 with $13.3 billion in cash and generated $3.75 billion in free cash flow. So, the stock is priced at 178x trailing cash flows, making NVIDIA one of the most expensive large-cap stocks on Wall Street.
The final takeaway
NVDA remains a top bet for long-term shareholders but currently trades at a premium. Given the current market conditions, I believe that any earnings or revenue miss (NVDA's next earnings release is scheduled for May 24th, 2023) will drag NVDA stock significantly lower. During the bear market of 2022, NVDA stock was trading around 66% below all-time highs in November 2021, as investors were concerned over slowing top-line growth and rising costs.
Although the company is part of several rapidly expanding addressable markets such as AI, gaming, and autonomous vehicles, it's current valuation is quite lofty. The consensus price target by Wall Street analysts is $276.52, which is only about 1% higher than where the stock is currently trading. So it's my opinion that at it's current price, the risk of NVDA's stock price falling to lower levels is the near-term is greater than the stock going much higher.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
