Artificial Intelligence (AI) prodigy Nvidia (NVDA), the world’s third most valued stock, saw a major drop in market capitalization following its second-quarter earnings in late August. However, NVDA stock has shown some vigor again, rising 5% in the past week. After temporarily surpassing the $3 trillion milestone earlier this year, investors are wondering what the future holds. My thesis remains unchanged: I am bullish on NVDA stock as an investment due to its clear AI supremacy and exponential growth potential.
NVDA’s long-term AI-driven growth trajectory remains intact
It is well known that NVDA is positioned for a long growth trajectory with blue-chip clients such as Microsoft (MSFT), Alphabet (GOOGL), Meta (META), and Amazon (AMZN) increasing their AI efforts. However, beyond these leading customers, Nvidia’s AI penetration continues to increase across industries, adding to my optimism for NVDA stock. Companies across industries and geographies are eager to incorporate the benefits of AI into their operations. Likewise, NVDA continues to collaborate with major companies.
There’s a reason companies are flocking to NVDA for their AI ambitions. Beyond being the leader in AI GPU processors, NVDA provides a complete end-to-end AI infrastructure that powers productivity. That’s something few, if any, of its global AI peers can offer.
NVDA remains a comprehensive AI powerhouse with room for growth
Another reason for my optimism about NVDA is CEO Jensen Huang’s relentless focus. It is committed to transforming NVDA into a fully AI-powered data center covering all aspects of hardware and software under the NVDA brand.
This strategy is a key reason why NVDA is able to maintain premium prices for its products, contributing to the constant growth of its profit margins. However, critics argue that NVDA’s exceptional revenue and margin growth may not be sustainable. Some members of the investment community are concerned about a slowdown in revenue growth in the coming years.
To put it in context, NVDA reported an extraordinary 217% increase in its data center revenue for fiscal 2024. While that growth is expected to moderate to around 130% in 2025, it’s still an impressive number of triple digits, especially considering the solid comparison base of fiscal year 2024. . Although lower than the current pace, they are still notable growth projections for the future. I see analysts’ bullish estimates as a reason to remain confident in this AI leader, especially since the disruptive potential of generative AI is just beginning to unfold.
Demand for NVDA chips is strong and will boost future revenue in the coming quarters. Therefore, despite some investors’ concerns, I expect NVDA to continue to maintain its clear dominance of AI with an unbeatable competitive moat and best-in-class AI products and services.
A discussion on Nvidia’s impressive quarterly earnings
Nvidia posted another stellar second quarter result on August 28, 2024, driven by accelerated computing and the continued push for generative AI. Adjusted earnings of $0.68 per share comfortably beat analysts’ consensus estimate of $0.65 per share. The figure was much higher (+152%) than the fiscal second quarter 2023 figure of $0.27 per share.
The company posted year-over-year revenue growth of 122%, generating $30.04 billion for the three months ending July 31 and surpassing analyst projections. Importantly, data center revenue, the company’s crown jewel division, grew 154% year over year to $26.3 billion. Additionally, NVDA’s adjusted gross margin expanded 5 percentage points to 75.1% from 70.1% a year ago. Apparently, many investors were expecting even higher numbers and therefore the stock fell slightly after the second quarter report. The stock then continued a downward trend until bottoming on September 6, just above the $100 level.
Nvidia’s third-quarter forecasts appeared less promising to investors, with revenue expected to reach about $32.5 billion. Guidance was below expectations. Adjusted gross margins are expected to stabilize at around 75%, down from 75.15% in the second quarter.
NVDA Insider Selling Concerns Are Over
Insider selling at Nvidia added downward pressure on NVDA stock in recent months. CEO Jensen Huang sold NVDA shares in multiple transactions from June to September, but it’s important to know that those sales were part of a predetermined trading plan adopted in March. This plan allowed Huang to sell up to six million NVDA shares by the end of the first quarter of 2025.
Notably, Huang has completed sales worth more than $700 million in NVDA stock. Despite the importance of these sales, he remains the company’s largest individual shareholder. At last report, Huang owned 786 million shares through various trusts and partnerships, and 75.3 million shares directly, according to company filings. Collectively, Huang controls a ~3.5% stake in the company, totaling approximately 859 million shares.
NVDA’s valuation is not expensive, given its ability to grow earnings
Investors may have been hesitant to buy NVDA stock at current levels, pointing to the stock’s extraordinary run, as well as due to concerns about the company’s slowing growth.
On the contrary, however, my opinion is that NVDA stock is not as expensive as it seems. It currently trades at a forward price-to-earnings ratio of approximately 43 times (based on fiscal 2025 earnings expectations). This is actually cheaper than some valuation multiples of its peers. For example, NVDA’s closest competitor and US-based semiconductor company, Advanced Micro Devices, has a forward P/E of 46.8 times. Interestingly, NVDA’s current valuation still reflects a 10% discount to its five-year average forward P/E of 47.3x.
Given NVDA’s continued outperformance and strong growth potential, the current valuation appears reasonable and justified. In my opinion, any future decline in share price could represent a solid buying opportunity, especially considering Nvidia’s immense potential in the rapidly expanding AI market.
Is NVDA Stock a Buy or a Sell, According to Analysts?
With 39 Buy and three Hold ratings from analysts in the last three months, the TipRanks consensus rating is a Strong Buy. Nvidia’s average stock price target of $152.44 implies a potential gain of about 26% over the next year.
Conclusion: Consider NVDA Stock for Its Long-Term AI Potential
Despite the recent weakness, NVDA stock has nearly tripled over the past year compared to a rise of around 37% for the Nasdaq 100. The post-earnings sell-off in NVDA stock, in my opinion, was largely driven by profit taking. After bottoming near $100, the stock now appears to be in recovery mode.
In the short term, I think the current economic and political uncertainties may keep the stock range-bound. However, I see any dip as a buying opportunity. I see NVDA as a strong long-term investment given the significant ongoing potential of AI.
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