The NVIDIA (NVDA:NASDAQ) share price is having an incredible run in 2024. Year to date, shares in the chip designer are up more than +60%, most recently boosted by blowout Q4 earnings. But is NVIDIA stock still worth buying after such an impressive run? The answer, in my view, is yes but with a few important caveats.
Impressive earnings
The GPU chipmaker reported Q4 earnings after the close on Feb 21st, and frankly, NVIDIA smashed analyst expectations.
Reporting EPS of $5.16 vs analysts’ estimates of $4.60, NVIDIA has also guided significantly higher revenues for the coming quarter.
NVIDIA stock was trading at $674, before its latest earnings, and thus below the consensus target price of $724.19 per share the price traded up to $788.00 post the earnings announcement, a gain of over +15%
Make no bones about it NVIDIA trades on eye-watering financial multiples:
- 42 times price-to-sales
- 56 times price-to-book value
- 107 times price-to-free-cashflow
However, at the same time, quarterly revenue at the firm jumped to $22.10 billion.
Up by +22.0% from Q3, and by +265.0% from this time last year.
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Artificial Intelligence
Generative AI is a catalyst for change, however for the moment at least, the media hype had far exceeded the benefits of any real-world applications, though it seems likely that this won’t always be the case.
Despite that analysts are now talking about a tidal wave of spending on AI technology in which NVIDIA could be a major beneficiary; some have raised their price target to $1100.
What’s got analayst got so excited? Well, the revenue NVIDIA generates from data-centres came in at $18.40 billion in Q4. That’s up from just $3.75 billion in Q1 2023, almost a +500.0% growth rate in a short period of time.
Still a buy?
So is NVIDIA a buy, sell or hold? NVIDIA is powering the much-vaunted AI revolution, so there is some justification for its share price strength. For two good reasons:
- The firm is the dominant player in the artificial intelligence (AI) chip space, with a market share of around 80%.
- Its products – such as its H100 graphics processing unit (GPU) – are used by nearly all of the major players in AI including Google, Microsoft, and ChatGPT creator OpenAI.
Right now, demand for AI chips is off the charts due to the strong interest in generative AI globally.
And this was reflected in NVIDIA’s recent fourth-quarter results.
Not only did the company easily beat the top and bottom-line estimates, but it also provided Q1 guidance that was ahead of forecasts thanks to the demand for its AI chips,
NVIDIA said that it is expecting revenue of as much as $24.0 billion for the first quarter. However, some analysts suggest that the firm has the potential to generate $150.0 billion in GPU revenues over this year.
However a sceptic might ask if the company could actually meet that level of demand.
Nevertheless On the back of the Q1 guidance – which has sent the stock up to record highs – analysts have been increasing their targets for NVIDIA.
A large number of brokers have lifted their price targets, several of them by $200.00 or more per share. These revised targets tell us that the brokers see further upside ahead.
$1,000?
Will NVIDIA reach $1,000? Make no mistake, the growth potential here is enormous.
So despite the fact that hitting the $1000 mark would require a price rise of almost +25% from the current levels, it’s far from impossible.
NVIDIA CEO’s Jensen Huang believes that in the years ahead, a trillion dollars of installed global data centre infrastructure will transition from ‘general purpose’ to ‘accelerated computing’ as organisations race to apply generative AI into their business processes.
If he’s right, this company is set for massive growth.
NVIDIA is not just an AI story though. This is a company that is at the heart of many high-growth industries including:
- The metaverse – Meta Platforms is building its metaverse with NVIDIA chips. Meanwhile, Nvidia actually has its own version of the metaverse called the ‘Omniverse’.
- Self-driving cars – NVIDIA offers an end-to-end platform for autonomous vehicles.
- Video gaming – NVIDIA remains a leader in the gaming industry thanks to its high-power GPUs.
Overall, the NVIDIA’s future looks very exciting.
Risky Valuation
Is NVIDIA Overvalued? Now, there are plenty of risks to consider here. One is the fact that other chip designers are desperately trying to capture market share from NVIDIA.
Advanced Micro Devices (AMD) is one such company. It recently partnered with Microsoft to develop high-powered AI chips.
Another risk is the stock’s volatility. It’s worth stressing that NVIDIA is an extremely volatile stock. Throughout history, it has regularly had pullbacks of 30% or more. It’s therefore not a stock for those who prioritise capital preservation.
To some extent NVIDIA’s share price movements defy logic as the stock has taken on an almost cult-like status, in the same way that Tesla (TSLA) did.
In fact, NVIDIA recently deposed Tesla as the most actively traded US options stock.
NVIDIA acolytes will brook no argument about the stock’s future price performance and prospects, and on that basis alone, its share price seems destined to head higher.
Having said that, after its recent rise, and with earnings now in the bag there is always the chance of a pullback, once the dust settles. So the best approach here may be to average into NVIDIA stock over time.
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