Nvidia (NASDAQ:NVDA) stock was trading at $146.14 at the start of 2023. As I write early on 23 January, its shares are worth $596.54, representing a 308.2% return.
If I’d invested £10,000 back then, I’d have £30,820 today. What else could an investor ask for?
The growth story
Nvidia’s third-quarter results for fiscal 2024, released in November, were truly exceptional. Revenue grew from $5.9bn in the prior year to $18.1bn this time.
The gross margin also improved from 53.6% to 74%. Furthermore, I’d usually expect such a rise in revenue to come with a significant increase in operating expenses. However, this only increased by 16%.
Earnings per share (EPS) were another treat. From $0.27 last time they grew to $3.71, a rise of 1,274%.
It’s easy to understand the optimism surrounding the company and why its stock price has risen.
Valuation concerns
The one thing that troubles me with Nvidia is its expensive valuation.
It’s currently trading with a price-to-earnings (P/E) ratio of 78.5 and a price-to-sales (P/S) ratio of 33.
This is very expensive, leading to suggestions that the stock price is frothy.
AI supremacy
Ultimately, what would make Nvidia a great investment today, is its prospects going forward.
And I think they’re bright.
There are of course some risks. Competition within the GPU market is growing. Intel and Advanced Micro Devices both have plans to begin shipping new GPUs soon. Other large companies, such as Microsoft and Amazon are also planning to enter the fray. Furthermore, Nvidia’s reliance on Taiwan Semiconductor for chip production could be an issue should geopolitical tensions escalate in Taiwan.
But its dominant position in the AI space could be a catalyst for further growth. This is a market that’s expected to be worth $1.81trn by 2030.
Its AI graphic cards, which are used for many applications such as generative AI, are the preferred option for many developers. It has a 90% market share.
With the AI market valued at $197bn in 2023, we could see a compound annual growth rate of 37.3% up to 2030.
In its latest quarterly results, Nvidia guided that its final quarter revenue for fiscal 2024 should be around $20bn. Assuming this is the case, its revenue for the year should be £58.8bn. The consensus among analysts is that it should then hit $92bn in 2025. This represents growth of 56.5%.
Let’s say that from this point, Nvidia retains market share and grows in line with the AI market at 37.3% annually. By 2030, it could have revenues of $449bn.
Even if we were to be conservative, and assume it loses market share as competition in the world of AI intensifies, it will still generate significant revenues. For example, if it only grows by 25% a year (far below its current rate and that expected of the market as a whole), it will still generate $281bn.
Suddenly, the stock no longer looks expensive. Rather, it’s starting to look cheap to me.
If the stock price lags behind revenue growth, for example, growing at just 15% a year from the start of 2024 onwards, it’ll still turn a £10,000 investment into £26,600 by 2030.
This signifies a very good investment and I’ve been conservative with my figures. Therefore, if I had the spare cash, I’d buy Nvidia stock today.
