Nvidia (NASDAQ:NVDA) stock took many investors by surprise in 2023, surging from $148 to over $500.
It’s been, by no means, a steady rise, with the stock losing almost half of its value in 2022. Nonetheless, had I invested five years ago, I’d have seen 1,440% growth.
That means if I’d bought £10,000 worth of the tech star five years ago, today I’d have £154,000. I’d have a little extra too, because the pound is marginally weaker today than back then.
So, how has this happened, and should I consider investing in Nvidia?
AI revolution
Nvidia has played a pivotal role in the development and advancement of artificial intelligence (AI), becoming a key enabler of the AI revolution.
Its powerful graphics processing units (GPUs) have revolutionised AI training and inference. They power cutting-edge applications across a wide range of industries.
Nvidia’s GPUs, originally designed for high-performance graphics rendering — useful for things like gaming — possess parallel processing capabilities that are ideally suited for AI workloads.
Unlike traditional CPUs, which are designed for sequential tasks, GPUs excel at handling thousands of parallel computations simultaneously. This makes them far more efficient for training and running AI models.
In addition to its powerful GPUs, Nvidia has developed a comprehensive software platform that simplifies the development and deployment of AI applications.
Collectively, these factors have made the company a go-to partner for AI developers, researchers, and businesses.
Earnings surge
The GPU maker has seen its earnings surge over the past 12 months. It’s quite incredible.
Nvidia’s Q3 performance was nothing short of phenomenal, with its revenue soaring to an astonishing 206% year-on-year growth.
This translated into net income of $9.24bn, or to $3.71 per share. In turn, this represents a staggering 12-fold increase from the previous year’s corresponding quarter.
Nvidia attributed half of this impressive data centre revenue to cloud infrastructure providers.
Looking ahead, the company confidently projected revenue of $20bn for the fourth quarter, implying a remarkable 231% growth trajectory.
Still value to be found?
At the time of writing (in the week before Christmas), Nvidia shares are trading for around $500. But the average share price target is now $651. That’s 33.2% higher.
But do valuation metrics support this? Well, Nvidia currently looks a little expensive. It’s trading at 64.4 times TTM (trailing 12 month) earnings and 43.8 times forward earnings.
But as the difference between TTM and forward earnings suggests, Nvidia is expected to grow at a phenomenal rate in the coming years.
In fact, analysts expect earnings per share to increase at a compound annual growth rate of 36.6%. That’s truly groundbreaking for a company with a valuation of over $1trn.
However, this gives Nvidia a price/earnings-to-growth ratio of 1.09. This earnings ratio, which is adjusted for growth, implies that the stock is overvalued by 9%. A ratio of ‘one’ suggests fair value.
It’s a tough one. I’m very tempted by Nvidia’s momentum and excellent growth forecasts. However, I’m equally wary that it’s rather pricey. As such, it’s on my watchlist but I’m not buying for now.
