Nvidia‘s (NASDAQ:NVDA) is arguably one of the most exciting growth stocks in the US stock market. It has increased more than 200% in value over the past year as the buzz around artificial intelligence (AI) continues.
Yet the business – whose powerful graphics processing units (GPUs) are helping to fuel the AI boom – is highly vulnerable to tough economic conditions. Revenues may dry up when companies and consumers feel less.
But Nvidia’s outlook is hot for the next three years, according to City analysts. Their earnings predictions are shown below:
| A year | Earnings per share | Annual growth | Price-to-earnings (P/E) ratio. |
|---|---|---|---|
| 2024 | 284.23 US cents | 136% | 49.2 times |
| 2025 | cost 405.77 US dollars | 43% | 34.5 times |
| 2026 | 472.08 US cents | 16% | 29.6 times |
Of course, real-world profits don’t measure up, so the numbers aren’t guaranteed. But Nvidia also has the ability to post impressive results.
So how realistic are current profit margins? And should I buy Nvidia shares in my portfolio?
A case of bull
As I say, the chipbuilder has a solid track record of exceeding market expectations. Its second quarter trading statement shows sales and underlying operating profit increased by 122% and 116% respectively year on year.
Remarkably, this was the seventh consecutive quarter in which results exceeded forecasts. Demand for hardware for AI applications has continued to increase, meaning Data Center sales have jumped 154% from the same period in 2023.
AI is a pillar where investors are flocking to chipbuilders. But there are other reasons to be bullish as well, from the growth of cryptocurrency mining and gaming, to increased demand for cloud computing and super-powerful computing.
Nvidia’s earnings may increase again with the return of Donald Trump as the US president. Looser regulations in areas like AI could give growth an extra shot in the arm. The firm may also benefit indirectly from new environmental standards that are developing sectors such as crypto and data centers.
Bear bag
Nvidia’s fantastic ability to break predictions also presents a problem. Investors expect dramatic growth every time it updates the market, and if this doesn’t happen the stock price may drop.
This happened following its second quarter update in August. Sure, the trading numbers boosted the ratings, but Nvidia didn’t make fun of them like it did before. So the stock price goes down.
The business is facing headwinds that mean the era of phenomenal growth may be behind us. Supply chain issues are becoming more likely, while competition is increasing from other chip makers.
As mentioned above, tech company profits are also highly cyclical, leaving them vulnerable to new economic downturns. After Trump’s election victory, and the possibility of higher inflation and trade wars, this threat may have intensified.
The decision
I believe Nvidia looks well positioned to grow earnings strongly in the short term and beyond. Although it is seen as a beacon of AI, it represents the biggest gain from digital growth in the wider world.
That said, I have strong reservations about buying a chip maker myself. And this depends a lot on its large scale.
Nvidia’s share price trades at a forward P/E ratio of around 50 times. This is far ahead of the broader technology sector. And it fails to properly reflect those profit risks I’ve described as well.
On balance, I’d rather find some stocks to buy for the AI revolution.
Source link
