Posting Record Gains of 2300%, Has Nvidia's Share Price Reached Its Peak?
Posting Record Gains of 2300%, Has Nvidia's Share Price Reached Its Peak?
Over the past few years, artificial intelligence (AI) has experienced rapid expansion into various sectors of life, and companies in this field have found themselves at the epicenter of the next significant AI application advancement. Among these key players, Nvidia (NVDA, up 4.45%) has truly stood out, experiencing a staggering 2,300% increase in value over the last five years. Investors have been eager to capitalize on this growth as Nvidia rides the AI wave, offering data center and graphics chips.
The stock's impressive one-year return of 199% is a testament to Nvidia's continued relevance in the AI sphere, driven by the skyrocketing demand for GPUs (graphics processing units) used in AI models. These GPUs are now essential for various industries, including cloud computing, finance, and healthcare. As companies scramble to incorporate AI into their operations, Nvidia's demand for GPUs remains high, and the company has established itself as a key supplier for the graphics sector of infrastructure.
However, with the stock approaching record highs and trading at a premium, it's only natural to wonder whether Nvidia's stock surge has reached its peak or if there are still opportunities for further growth.
Supply and demand balance
As highlighted by fellow Fool writer Adria Cimino, Nvidia commands a substantial 80% market share in its products. A strong position to be in indeed.
Nvidia's graphics cards are crucial components of many AI systems, and as AI technology trends upward, the need for these graphics cards becomes even more crucial. Digitaltrends.com has warned of a possible GPU shortage, especially for gamers, leading to a supply and demand imbalance that could benefit Nvidia. As long as AI and machine learning chip demand continues to increase, while supplies remain constrained, the outlook for this stock remains positive, as evident in Nvidia's rapid revenue growth between fiscal 2023 and 2024.
Financial performance remains impressive
Nvidia's most recent financials are nothing short of impressive for a growth stock. The latest quarter saw a 94% revenue increase to $35.08 billion, along with an 111% year-over-year earnings growth to $0.78 per diluted share. This equates to approximately $19.3 billion.
I place a significant emphasis on earnings, as they are the foundation of a stock's long-term performance. In Nvidia's case, I remain confident in its earnings potential and overall revenue growth potential, as they've influenced Nvidia's stock price growth over the past five years to a striking extent. The below chart demonstrates the correlation between Nvidia's stock price and GAAP earnings per share over the past five years.
One of the appealing aspects of Nvidia's third-quarter results was the anticipated fourth-quarter GAAP margin of 73%. This high-margin business is something I appreciate.
Is Nvidia's growth peak?
The simple answer? Not a chance. To reaffirm my earlier point, the expanding AI landscape ensures Nvidia's role in the industry will continue to grow.
The reasons for this are numerous. If you take a look at Nvidia's third-quarter press release, you'll find announcements of expansion into new growth areas, such as the launch of a supercomputer in Denmark powered by over 1,500 Nvidia GPUs and the introduction of an AI aerial platform that has already started collaborating with T-Mobile, Ericsson, and Nokia. In addition, Nvidia's technology is being employed in various sectors, such as new Volvo SUVs.
Looking ahead, Wall Street analysts forecast Nvidia to conclude fiscal 2025 with $2.95 per share, giving it a forward P/E ratio of 47.2 times earnings. While a premium of 47 times earnings might seem steep for Nvidia shares given its industry dominance and long-term potential, you must consider how Tesla, for example, trades at almost 100 times earnings, or Cava, a stock I admire, trades at over 300 times earnings.
This is a company that is far from peaking. In fact, its best years are likely still to come. My advice is to not shy away from buying at current price levels.
Given Nvidia's strong position in the AI market, with a 80% market share in its products, investing in its stock could be a strategic move for those interested in the finance sector. The company's impressive financial performance, including a 94% revenue increase and an 111% year-over-year earnings growth, further supports this view. With the predicted increase in demand for AI and machine learning chips, and potential supply constraints, Nvidia's stock could continue to perform well in the future.