Nvidia (NASDAQ: NVDA ) has been one of the hottest companies in 2024, with its share price up more than 120% in the past year alone. The graphics chip maker has become the poster child for the AI revolution, as its powerful GPUs have proven invaluable for training and running large models. But after such an amazing run, I suspect many investors are wondering: where is this CEO of The NASDAQ Composite index from here?
Can the momentum continue?
The good case here is actually straightforward. The AI boom may still be in its early innings, and the company remains in a different place to monetize it. The latest quarterly results certainly support this view. Revenue more than doubled year-on-year to $30.04bn, while earnings per share rose 419%.
With OpenAI, Microsoft, Google, and others continuing to invest heavily in AI infrastructure, the demand for high-end GPUs shows no signs of slowing down. Many analysts argue that at a price-to-earnings (P/E) ratio of 55, and a price-to-sales (P/S) ratio of 30 times, the valuation is reasonable given the path to growth and dominance in AI. chips. The recent launch of the next-generation Hopper and Blackwell AI platforms could propel the next leg up.
On the other hand, there are those who suggest that much of the future growth is already indicated in the current stock price. The meteoric rise has taken the market to a staggering $2.9trn. This makes it the third most valuable company in the world, only behind an apple and Microsoft.
There are concerns that the chip market may face oversupply issues in the coming years as competitors like it AMD again Intel increase production. This can put significant pressure on profit margins and growth rates. As history has shown, the cyclical nature of the semiconductor industry is another major risk to be aware of. When investor enthusiasm fades, the price can quickly move in the opposite direction.
However, I am more concerned about the political tension between the US and China. Export restrictions on advanced chips could negatively impact sales to Chinese customers.
An important few months
In my opinion, the share price is likely to remain highly volatile in the near term as the market digests its large upside and defies its valuation.
However, I believe the long-term outlook remains bright. The company's technology leadership, strong performance, and exposure to many growth markets beyond AI (gaming, automotive, etc.) should allow it to grow into its valuation over time.
Analysts forecast annual revenue to grow 85% to $108bn next year, and earnings to rise 70% to $12 per share. If management can meet or exceed these lofty expectations, it could propel stocks higher.
That said, I expect a return to mediocrity at some point. A more reasonable target would be an annual return of 20%-30% over the next few years, assuming the company can maintain its competitive edge and the AI momentum continues. So while Nvidia's current share price gives me pause, I believe the company's growth prospects and industry positioning justify the premium. I will be buying shares at the next opportunity.
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