Moreover, Nvidia’s forward price-to-earnings (P/E) ratio of 37 is nearly double that of the S&P 500. Euphoria surrounding the possibilities of artificial intelligence (AI) technology is pushing the stock market to record levels. While there are many companies shaping the AI narrative, I would argue that Nvidia (NVDA -0.12%) is cast in the lead role. It operates within the semiconductor industry and some of its main rivals include, Intel Corp. (INTC), Advanced Micro Devices Inc. (AMD), and Xilinx Inc. (XLNX). NVIDIA generated a net income of $4.3 billion on $16.7 of revenue in its 2021 fiscal year (FY), which ended Jan. 31, 2021.
This represents modest upside from the stock’s current levels, despite expectations for another leg up in Nvidia’s forward estimates post-F1Q25 earnings release. However, if a 122% multiple premium is applied to the semiconductor peer group’s current multiple trendline, the resulting P/S ratio of 22.4x would yield an estimated price of close to $1,000 apiece. There remains potential for a further upsurge of this extent approaching Nvidia’s next earnings release. Our current revenue growth estimates for FY 2025 through FY 2027 outperforms consensus expectations by a similar extent to what was observed post-F4Q24 earnings release. This accordingly corroborates the potential for another upward deviation in Nvidia’s valuation multiple premium to the broader semiconductor peer group leading up to its next earnings, which we expect to be another upside surprise.
Alternatively, a flatter peer group trendline like that observed in mid-February could mark a fair industry bear case in the near-term. Based on the foregoing analysis, we believe AI momentum should remain intact and resilient in the near-term. Thus, any prolonged moderation should not fall far from the bottom observed in recent months. By applying a 122% multiple premium to this baseline, the resulting P/S ratio is at about 9.3x, which would yield an estimated price of about $920. An exception was observed in February, shortly after Nvidia finished the fiscal fourth quarter.
Is NVIDIA (NVDA) Based in the U.S.?
NVIDIA Corp. (NVDA) designs, develops, and markets graphics processors as well as related software and hardware products. The company has played a pioneering role in the development of the graphics processing unit (GPU), a type of chip or electronic circuit capable of rendering graphics for display https://www.dowjonesrisk.com/ on electronic devices. GPUs were originally designed for the PC graphics market and video gaming industry. The big questions is where the broader semiconductor peer group multiple trendline will be – i.e., what is the base to Nvidia’s anticipated valuation premium leading up to its F1Q25 earnings.
But momentum is expected to pick up gradually post-GTC, and more prominently approaching the F1Q25 period-end and on the heels of said earnings release. This accordingly underscores further expansion in the market for AI accelerators and GPUs, which Nvidia thrives in. And continued resilience in Nvidia’s core demand environment is corroborated by the elevated level of ongoing and impending investments into the nascent technology. For instance, OpenAI’s Sam Altman has been pursuing an ambitious plan to build a $7 trillion venture for the development of artificial general intelligence that will outsmart humans. Said investment plans are similarly echoed by SoftBank’s Masayoshi Son’s consideration of a $100 billion AI chip venture. Not only are sales skyrocketing, but Nvidia’s commanding position in the graphics processing unit (GPU) and data center business has provided the company with unparalleled pricing power.
The platform allowed the company’s GPUs to be used for more than rendering graphics, and would eventually prove to be one of Nvidia’s biggest advantages in the explosively growing world of artificial intelligence and machine learning. On January 22, 1999, the company holds its initial public offering on the Nasdaq exchange the Nvidia stock price was $12 a share. Just two years after going public, Nvidia was added the the S&P 500 in 2001. The company was the fastest every semiconductor company to reach $1 billion in revenue. In the wake of the surge in Nvidia’s stock, the company’s valuation multiples have become a bit extended.
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- This represents modest upside from the stock’s current levels, despite expectations for another leg up in Nvidia’s forward estimates post-F1Q25 earnings release.
- And continued resilience in Nvidia’s core demand environment is corroborated by the elevated level of ongoing and impending investments into the nascent technology.
- Livy Investment Research is a technology sector research analyst providing long investment ideas by uncovering hidden value ahead of the tech innovation curve.
- Taiwan Semiconductor Manufacturing Co. (TSMC) and Samsung Electronics Co.
- The commission also said that the combination would create the potential for a stifling of innovation in next-generation technologies, such as technologies used to power data centers and driver-assistance systems in cars.
Anticipated momentum in higher-margin data center sales will also reinforce the sustainability of Nvidia’s gross margin in the mid-70% range as guided by management. This accordingly provides incremental durability to its valuation premium to peers over the next year. As mentioned earlier, Nvidia exhibits company-specific tailwinds that corroborate continued growth outperformance in the near-term. They include improvements to GPU supply to fill backlogged demand and favorable H200 pricing with shipment ramp-up. Nvidia’s key customers across the cloud computing and enterprise segments have also echoed resilient capex and R&D prioritization within the foreseeable future for AI developments during the latest earnings season. This will inadvertently reinforce demand for supporting infrastructure, which includes AI chips for accelerated computing data centers and full stack Nvidia software.
The stock is expensive, but worth the premium
NVIDIA was founded in 1993 by current Chief Executive Officer (CEO) Jensen Huang, Chris Malachowsky, and Curtis Priem. The company introduced the GeForce 256 in 1999, calling it the world’s first GPU. In January of that same year, NVIDIA went public through an initial public offering (IPO). Today, the company’s GPUs power many of the world’s fastest supercomputers. Despite its ultra-premium valuation, I see Nvidia’s stock as a solid opportunity for long-term investors. At a macro level, heavy secular tailwinds fuel AI budgets, and I don’t expect those to abate anytime soon.
This has helped it expand its margins materially — improvements that flow directly to the bottom line. The company’s breakthroughs in compute networking are impacting a multitude of AI applications, including machine learning, generative AI, and large language models (LLMs). Nvidia is currently the nucleus of most systems powering modern AI tools, and investors have been cheering on the stock.
Nvidia is trading right where it should be right now after normalizing for market’s favorable pricing of its F4Q24 outperformance and solid F1Q25 guidance. We have been tracking Nvidia’s valuation multiple on a relative basis to the broader semiconductor peer group over the past quarter. And Nvidia has consistently demonstrated a ~90% premium to the peer group trendline on a relative basis to its consensus growth estimate. Considering the consensus growth estimate of 81.5% for Nvidia’s FY 2025 revenue, the stock should trade at about 9.5x on the proxy trendline. And applying the 122% pre-earnings multiple premium to the proxy trendline result would yield an estimated P/S multiple of 21.1x for Nvidia expected F1Q25 close. By applying 21.1x to Nvidia’s current consensus FY 2025 revenue estimate of $110.6 billion, the stock should trade at about $938 apiece.
On Sept. 13, 2020, NVIDIA announced that it had agreed to acquire Arm Ltd., a U.K.-based semiconductor and software company specializing in AI, from Japan-based SoftBank Group Corp. (SFTBY) and the SoftBank Vision Fund for $40 billion. NVIDIA said that it expected the transaction to close in approximately 18 months. But the deal has come under intense scrutiny from regulators worldwide and is thus unlikely to be completed within the original timeframe, if at all. Taken together, we believe any dips below the $900-level for Nvidia leading up to its next earnings release would represent a buy opportunity for further upside potential in the near-term. The annual keynote is typically accompanied by volatility in the stock.
Nvidia stock price rose about 30% after the company nearly doubled analyst earnings expectations. The company’s data center business, which is where many of its chips are bought for AI processing, brought in $240 million in revenue in the quarter. The company’s chips are used in gaming consoles and data centers, which have seen soaring demand during the pandemic. The company’s quarterly revenue rose 50% year-over-year (YOY) to hit a new record of $7.1 billion in Q3 FY 2022, which ended Oct. 31, 2021. The company said that it achieved record data center revenue, which rose 55% YOY, and record gaming revenue, up 42% YOY. Yet, the stock’s biggest intraday drop since May 2023 at the close of last week has dialed up the volume on concerns over whether Nvidia’s currently lofty valuation and growth expectations are sustainable.
In a conference call with analysts, CEO Jensen Huang said that he felt very good about the company’s supply situation, despite the chip shortage. While soaring chip demand is driving NVIDIA’s record financial results, the company still has been concerned about possible shortages because it’s a “fabless company” (see the FAQs section below). Instead, it designs chips and outsources the manufacturing to third-party companies to do the fabrication. NVIDIA could thus still be affected by the shortage if its third-party suppliers cannot manufacture chips fast enough to meet soaring demand. Perhaps the most consequential advance in Nvidia’s history was the 2006 launch of the company’s CUDA development platform.