Key points
- A market leader in designing high-end graphics processing units used for online gaming and artificial intelligence applications.
- One of the best-performing stocks in the entire market since 1999.
- An impressive growth outlook, but its stock is pricey based on fundamental valuation metrics.
Nvidia Corp. (NVDA) designs and markets high-end graphics and mobile processors used in computers, workstations, tablets, smartphones and many other applications. In the past 10 years, Nvidia’s stock has been one of the best performers in the entire stock market, sending the company’s market capitalization soaring up to more than $1.2 trillion.
Nvidia shares have been extremely volatile in recent years. The stock dropped more than 50% during a broad sell-off in the tech sector in 2022, its worst annual performance since the global financial crisis in 2008. However, Nvidia has been at the epicenter of the biggest investment theme on Wall Street in 2023: artificial intelligence technology. Nvidia has ridden the artificial intelligence (AI) trade to more than 240% year-to-date gain, putting the stock on track for its best annual performance since 2001.
Nvidia bulls say the company’s exposure to massive, long-term growth trends like AI technology, high-end online gaming, cloud computing, supercomputing and autonomous vehicles will keep the stock trending higher for years to come. Meanwhile, Nvidia bears call out the stock’s lofty valuation and say expectations for Nvidia may have become irrational.
Nvidia at a glance
Nvidia was founded in 1993 with the initial goal of bringing 3D graphics to video games and other multimedia applications. In 1999, Nvidia invented the graphics processing unit, or GPU, which completely revolutionized the computing industry.
Early Nvidia investors likely appreciated the company’s leadership position in the PC graphics cards market. Still, they never could have envisioned the central role Nvidia would play in the boom in PC video gaming, esports and online streaming during the 2010s.
In the past 20 years, Nvidia has been supplying the immense processing power required for some of the largest and most transformative trends in the tech industry, including cloud services, AI and automation.
Nvidia’s stock price went public at an initial public offering (IPO) price of $12 in January 1999, but it has split its stock five times in its history. The company’s most recent stock was a 4-to-1 split in July 2021. If you crunch the numbers on all five of Nvidia’s stock splits, a single share of Nvidia’s IPO stock would represent 48 shares of today’s NVDA stock.
The Nasdaq reached its dot-com bubble peak on March 10, 2000, and plummeted more than 60% over the following two years. Nvidia’s stock price, on the other hand, dropped just 1.2% in those two years.
Nvidia was one of the top performers in the tech sector during the first decade of the 21st century, but explosive growth numbers in the past 10 years sent Nvidia’s stock into overdrive. Nvidia has soared from a split-adjusted IPO price of just 25 cents to $499 per share in August 2023.
How has Nvidia stock performed?
To say Nvidia has been a good investment in the past 24 years since launching is an understatement. Nvidia is one of the best-performing stocks in the entire U.S. market in the past 30 years, with an overall return of around 60,000%.
In the past 10 years, Nvidia’s outperformance has accelerated. Nvidia has generated over a 600% return over the last five years compared to just a 55% total return for the S&P 500 in the same period.
Incredibly, even at a market cap of more than $1.2 trillion, Nvidia’s stock price is showing no signs of slowing down. Nvidia’s over 240% year-to-date gain so far in 2023 is the best performance of any stock in the S&P 500.
Opportunities and obstacles facing Nvidia
Nvidia is well-positioned to continue to outperform, but it also faces several potential stumbling blocks ahead.
Nvidia will likely continue to be one of the biggest winners from the rising popularity of ChatGPT and other AI and deep learning technologies — massive tech fields still in their infancy. Nvidia is also the market leader in GPUs for autonomous driving and other advanced driver assistance systems. The complexity of cutting-edge processing technology requires expertise that severely limits Nvidia’s competition.
But just because Nvidia’s future looks bright doesn’t mean it will be smooth sailing for Nvidia investors. Autonomous vehicles and artificial intelligence are certainly huge opportunities, but it is far too early in their growth phases to assume Nvidia will maintain its leadership position years down the line. Furthermore, a large portion of Nvidia’s current sales comes from PC gaming, a more mature market that may experience a growth slowdown in the years ahead. Finally, Nvidia’s stock currently trades at a steep valuation of about 60 times forward earnings and 45 times sales, suggesting a great deal of future success and growth are likely already priced into the stock at this point.
Strengths
- High exposure to AI and deep learning technology.
- Early market leader in GPUs used for autonomous driving systems.
- Business complexity limits competition.
Weaknesses
- A potential slowdown in PC gaming demand could weigh on overall growth.
- Huge stock price gains may set unrealistically high expectations for future growth.
- Heavily reliant on Taiwan Semiconductor Manufacturing Co. (TSM) to produce chips, creating geopolitical risk.
What can we expect from Nvidia in 2023?
While analysts are generally optimistic about Nvidia’s business and stock price in the long term, investors shouldn’t expect the stock to continue its torrid year-to-date pace in the near term. The analysts covering Nvidia project full-year adjusted earnings per share of $9.73 this fiscal year. In addition, NVDA analysts are calling for 81% revenue growth in fiscal 2024 and 48% growth in fiscal 2025.
Bank of America analyst Vivek Arya says Nvidia is his top semiconductor stock pick, and the company has a path to reach $22 in annual EPS by 2027.
“(Nvidia’s) long-term commitment in creating a full stack platform — optimized accelerators for inference/training, InfiniBand/Ethernet networking equipment, server-level solutions, 300-plus software libraries supporting AI initiatives — will support AI leadership for several years,” Arya said.
Bank of America has a “buy” rating and $550 price target for Nvidia.
CFRA Research analyst Angelo Zino says Nvidia’s growth trajectory is impressive, and generative AI creates unprecedented opportunities for the company.
“New software opportunities being created by NVDA, leveraging capabilities from the enterprise space across all industries, will only further increase demand for NVDA’s solutions (like autonomous vehicles),” Zino says.
Zino says Nvidia has growth levers outside of the GPU market as well, including its central processing units, or CPUs.
“NVDA will have the potential to leverage its new Grace CPU that it is now ramping, as well as InfiniBand networking offerings within the data center,” Zino says.
He also projects Nvidia will become more profitable in the next two years as its gross margins expand from 59% in fiscal 2023 to 69% in fiscal 2024 and 2025.
CFRA has a “buy” rating and $500 price target for NVDA stock.
The 44 analysts covering NVDA stock have a median price target of $622.50, as of Aug. 30, suggesting nearly 25% upside over the next 12 months. However, investors should always conduct their own research before making important investment decisions.
What can we expect in the coming years?
Nvidia’s story as an investment over the next several years will likely revolve around how large the investment cycle in AI technology will be and whether or not Nvidia’s chips remain the industry standard. Investors also will be watching to see if the online gaming boom shows signs of a significant slowdown. Autonomous vehicle technology could be a wildcard growth source for Nvidia as well.
Morningstar analyst Brian Colello says gaming and AI will be critical to the Nvidia growth story in the next decade.
“The linchpin of Nvidia’s business had been gaming. PC gaming enthusiasts generally purchase high-end discrete GPUs offered by the likes of Nvidia and AMD,” Colello says. “Going forward, we expect the data center segment to drive most of the firm’s growth, led by the explosive artificial intelligence phenomenon.”
However, after Nvidia’s huge 2023 run, buying at its current valuation is not necessarily a no-brainer. Morningstar has a “neutral” rating and only a $300 fair value estimate for Nvidia.
Frequently asked questions (FAQs)
Nvidia’s stock price reached $499 on Aug. 30, reaching an all-time high. The company is up more than 240% year to date after several blowout quarters this year.
The consensus 12-month price target among the Wall Street analysts covering NVDA is $622.50, suggesting about 25% upside from current levels.
It’s extremely difficult to predict long-term stock price movement given the range of factors involved, including the company’s fundamental performance, investor sentiment surrounding the stock and broad macroeconomic factors, such as interest rates and the overall economy’s health.
Nvidia has an extremely impressive long-term growth trajectory. But it needs to be clarified how much of that growth has already been priced into the stock at its current $1.2 trillion valuation.
