The year 2023 was a thrill ride for stock investors as artificial intelligence (AI) took center stage, propelling the tech-heavy Nasdaq to a soaring 40% increase. The Magnificent Seven stocks, particularly Nvidia, stood at the forefront of this AI mania, with its market cap swelling and joining the elite $1 trillion market-cap club alongside giants like Apple, Microsoft, Amazon, and Alphabet.
Not surprisingly, Wall Street maven Dan Ives of Wedbush Securities has anointed Nvidia as the godfather of AI. However, amidst its meteoric 237% surge, the question arises – could Nvidia stock be undervalued? Let’s delve into how Nvidia is spearheading the AI revolution and examine whether it’s prime time to acquire shares.
Unprecedented Demand
Nvidia has pioneered an array of graphics processing units (GPUs), with its A100 and H100 chips serving as the linchpins of its GPU lineup. Of note, the latter is witnessing an unprecedented surge in demand.
The graph depicting Nvidia’s quarterly revenue over the past decade notably demonstrates a steep upturn starting in 2023.
In its fiscal 2024 third quarter, which concluded on Oct. 29, the company reported a staggering record of $18.1 billion in revenue, signifying a 200% year-over-year increase. Furthermore, Nvidia’s profitability surged by a whopping 500% through the initial three quarters of its fiscal year.
Wall Street projects a 54% revenue surge this fiscal year, followed by a 20% increase the subsequent year. While this could imply decelerating revenue growth, it’s a reasonable progression, considering that it’s impractical to anticipate triple-digit percentage revenue expansion indefinitely. Furthermore, despite Nvidia’s supremacy in the AI data center GPU market, there are other formidable competitors gaining traction.
As 2024 appears poised to be another watershed year for Nvidia, the burning question for investors is the attractiveness of the stock from a valuation standpoint.
Tempting Valuation Metrics
As of the present time, the stock is trading at a forward price-to-earnings (P/E) multiple of 24.8. In contrast, its top rival, Advanced Micro Devices, commands a forward P/E of 37.
Even though AMD is making strides of its own, it still lags far behind Nvidia. Given Nvidia’s growth relative to AMD buoyed by its dominant share in AI data center GPUs, the discrepancy in valuation multiples raises eyebrows.
Moreover, the forward P/E of the S&P 500 stands at 21.7, not significantly lower than Nvidia’s. Considering the exceptional performance in 2023 and its bullish outlook for this year, it’s puzzling why Nvidia doesn’t warrant a higher premium.
There’s a hunch that investors are being more emotional than logical about Nvidia. The stock’s 2023 performance, coupled with its inclusion in the $1 trillion market-cap club, might create the perception of an expensive stock. However, the aforementioned multiples suggest that Nvidia is growing into its valuation, indicating that the stock might actually be a bargain.
This leads to the conclusion that Nvidia is likely to continue reaping the benefits of AI’s sustained tailwinds, making this an opportune moment to start dollar-cost averaging into a long-term position at an attractive price.
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