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In the ever-evolving landscape of artificial intelligence (AI), Nvidia (NVDA) stands tall as an undeniable powerhouse, applying technological innovations that not only shape industries but also redefine the boundaries of what's possible. Thanks to its specialized chips, Nvidia has positioned itself as the quintessential leader in the AI market. Given its leading edge, perhaps it's not surprising that Nvidia stock has skyrocketed 12,861% in the last decade.
Nvidia has smashed Wall Street’s earnings expectations in all three quarters of fiscal 2024, including the most recent Q3. Though some China-related headwinds loom, the company is upbeat about its growth prospects in the coming quarters. The first wave of AI was hugely favorable for Nvidia, and propelled its stock to a whopping 228% return YTD - wildly outperforming the tech-led Nasdaq Composite’s ($NASX) 36% gain.
Looking ahead, Wall Street believes that with the widespread adoption of AI, Nvidia will see even more growth. Even Nvidia's CEO believes the “second wave" of AI has begun.
If there is more growth to come, can Nvidia's stock reach its high target price prediction of $1,100 by the end of 2024? Let’s find out.
The Chip Designer Reports Another Blowout Quarter
Nvidia’s journey began with its groundbreaking graphical processing units (GPUs), initially designed for the high-end PC gaming market. However, these GPUs have now expanded to AI, automotive, healthcare, and data centers.
These high-performance H100 GPUs have laid the groundwork for Nvidia's dominance in the AI space, increasing revenue from $17 billion in fiscal 2021 to $33 billion over the trailing 12 months.
In Q3 of fiscal 2024, revenue grew an outstanding 206% year-over-year and 34% sequentially to $18.1 billion. Meanwhile, adjusted diluted earnings per share (EPS) jumped more than six times from the year-ago quarter to $4.02.
A revenue surge of 279% in the data center segment and a gaming revenue increase of 81% drove its exceptional third-quarter performance. Nvidia’s margins are also soaring, with its adjusted gross margin up to 75% in Q3 from 56% in the prior-year quarter.
Nvidia also generated $15.7 billion in free cash flow (FCF) for the nine months ended Oct. 29. This enormous FCF balance on hand enables a company to pay dividends, buy back shares, pay off debts, and plan mergers and acquisitions, among other purposes.
Talking about the results, CEO Jensen Huang stated, “NVIDIA GPUs, CPUs, networking, AI foundry services, and NVIDIA AI Enterprise software are all growth engines in full throttle." He added, “The era of generative AI is taking off.”
The Road Ahead for Nvidia Looks Bright
In 2023, Nvidia partnered with various leading companies worldwide on AI initiatives, like Dropbox (DBX), Foxconn, Reliance Industries, Infosys (INFY), and Lenovo (LNVGY), among others. In addition, the company launched a wide range of AI offerings in the quarter, which could contribute to its hypergrowth in the coming quarters.
Furthermore, CFO Colette Kress discussed concerns about the Commerce Department's restrictions on the export of advanced AI chips to China. While the new rules did not affect Nvidia's Q3 results, sales in China and other affected countries account for 20–25% of Data Center revenue. As a result, management anticipates a drop in sales in the fourth quarter, but believes it will be "more than offset by strong growth in other regions."
To tackle this, Nvidia is introducing a new AI chip designed to comply with the new export rules. However, Reuters reported that the company now plans to delay the launch to the first quarter of next year.
That said, Nvidia has healthy demand elsewhere. In Q3, Automotive revenue was up just 4% year-over-year in the quarter. Nvidia’s partnership with Foxconn will utilize its Nvidia Drive Hyperion 9 platform and Drive Thor systems to make next-generation electric vehicles (EVs) for the global market. With the EV market still expanding, there is more room for Nvidia to grow in this segment.
Keeping broader headwinds in mind, management now expects $20 billion (plus/minus 2%) in revenue in Q4, which is in line with analysts' forecasts. Management also anticipates an adjusted gross margin of 75.5% in Q4.
Speaking at a virtual conference in Paris earlier this month, Nvidia’s CEO stated, “We’re now seeing a major second wave, with a recognition that every region and every country needs to build their sovereign AI.” He went on to say that multiple industries adopting generative AI are another force propelling the second wave.
As competitors OpenAI, Microsoft (MSFT), and Advanced Micro Devices (AMD) intend to launch their own AI chips, ratcheting up Nvidia's dominant market position - which stands at 80%, according to Reuters - could prove difficult.
Looking ahead, analysts seem positive about the chipmaker's dominance in the AI space. For the full fiscal year 2024, analysts now forecast a gigantic jump of 262% in EPS to $12.10, with another surge to $19.52 expected in fiscal 2025. More importantly, revenue for fiscal 2024 could jump by 118% to $59 billion, further increasing to $88 billion in fiscal 2025.
In the last two years, the company has beat earnings estimates eight times while smashing revenue estimates seven times.
What Are Analysts Saying About Nvidia?
After its Q3 earnings, analysts at Truist, BMO Capital, Bank of America, Goldman Sachs, and many more increased their target prices for NVDA.
Overall, Nvidia has a “strong buy” rating on Wall Street. Out of the 35 analysts that cover the stock, 30 rate it a “strong buy, “ three rate it a “moderate buy,” and two analysts rate it a “hold.” The average target price for the stock is $646.29, which implies an upside potential of 34% over the next 12 months.
The stock trades at 24 times forward 2025 earnings and 13 times forward sales. Based on Nvidia's hypergrowth potential, the stock still does not appear to be overpriced.
Can the AI Leader Live Up to the Hype?
While China export concerns weighed on the stock after Q3 results, Nvidia has exponential growth prospects in the coming years. The demand for AI could progress as more industries expand into this lucrative niche.
Though the high target price of $1,100 by the end of 2024 may appear a little daunting, the likelihood of Nvidia stock reaching its mean target price is substantially higher. The stock is still trading below its 52-week high, presenting an opportunity for growth-oriented investors who believe Nvidia can maintain its lead in the AI race.
On the date of publication, Sushree Mohanty 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.
