On August 23, Nvidia stock (NASDAQ: NVDA) released its most recent earnings update. In the second quarter of fiscal 2024, which concluded on July 30, the semiconductor company experienced a remarkable 101% year-over-year surge in revenue, reaching an impressive $13.51 billion. This achievement exceeded analysts’ predictions by a substantial margin of $2.43 billion. Additionally, the adjusted earnings per share (EPS) witnessed an extraordinary growth of 429%, settling at $2.70 per share, which comfortably surpassed the consensus forecast by $0.61.
While these headline figures are undeniably noteworthy, a key question arises: Can Nvidia’s stock continue its impressive trajectory, having surged more than 220% since the beginning of the year? In order to make an informed decision, it’s prudent to delve into four compelling reasons to consider investing in Nvidia, while also acknowledging a potential factor that could lead to selling.
Let’s begin by examining the factors that support a positive outlook for Nvidia.
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1. The AI market lit a fire under its data center business
In the second quarter, Nvidia experienced a significant shift in its data center chip sales, accounting for 76% of its total revenue, a notable leap from the 57% recorded in the same period the previous year. Notably, its data center revenue exhibited an impressive 171% year-over-year surge within the quarter. This growth acceleration followed a 14% increase in the first quarter and an 11% rise in the fourth quarter of fiscal 2023.
This remarkable expansion was fueled by the rapid proliferation of the artificial intelligence (AI) market. Nvidia’s cutting-edge GPUs play a pivotal role in processing intricate AI tasks within data centers, with all major “generative AI” platforms, including OpenAI’s ChatGPT, relying on Nvidia’s chips. According to Allied Market Research, the generative AI sector is projected to sustain a compound annual growth rate (CAGR) of 34% from 2023 to 2032. This projection underscores the growing adoption of these services by companies aiming to enhance operational efficiency, automation, and overall business acceleration.
Importantly, Nvidia currently faces minimal competition in the data center GPU market. Consequently, the push for AI applications is anticipated to sustain the rapid expansion of Nvidia’s data center business. During a recent conference call, Nvidia’s CFO, Colette Kress, emphasized the ongoing “tremendous demand” for their “accelerated computing and AI platforms.” The company’s strategy involves ramping up its supply of these products each quarter throughout the upcoming year to meet this robust market demand.
2. Its gaming business is growing again
Nvidia proudly holds the position as the global leader in producing discrete GPUs tailored for PC gaming. This specific segment constituted 18% of Nvidia’s total revenue in the second quarter. However, it encountered a post-pandemic deceleration, echoing the broader slowdown in the PC and gaming markets. The situation was further exacerbated by the downturn in the cryptocurrency market, which triggered a flood of used GPUs into the market as disillusioned miners sought to offload their hardware.
Nevertheless, Nvidia’s gaming revenue experienced a remarkable 22% year-over-year upswing during the second quarter, effectively breaking a four-quarter streak of revenue decline. Moreover, this achievement marked the third consecutive quarter of sequential growth in the gaming segment.
Nvidia attributes this remarkable recovery to the strong demand for its GeForce RTX 40 series GPUs designed for both laptops and desktops. Additionally, the robust growth of the gaming laptop market during the back-to-school season contributed to this revival. It’s worth noting that Nvidia’s share of the discrete GPU market exhibited a notable expansion from 75% to 84% between the first quarters of calendar years 2023 and 2024, as reported by JPR. During the same period, AMD’s market share decreased from 24% to 12%. This expansion in Nvidia’s market presence underscores the prevailing preference among PC buyers for Nvidia’s emphasis on power-efficient performance, even at a premium price, as opposed to AMD’s strategy of offering more affordable yet less power-efficient chips.
3. Its gross margins are expanding
Nvidia’s commanding position in both the data center and gaming GPU markets empowers the company with significant pricing leverage. Furthermore, the augmentation of its high-margin software applications, bundled alongside its data center chips, contributes to a notable boost in its overall gross margin.
This strategic focus on software applications is evident in Nvidia’s impressive adjusted gross margin of 71.2% during the second quarter. This marked a substantial enhancement from the gross margin of 66.8% in the preceding quarter and a significant leap from the 45.9% recorded a year ago. The company’s projection for the upcoming third quarter anticipates a further rise, with the adjusted gross margin expected to fall within the range of 72% to 73%.
4. It expects its growth to accelerate again
Looking ahead to the third quarter, Nvidia is anticipating a substantial 170% year-over-year increase in its revenue. This projection would signify the continuation of a remarkable trend, marking its third consecutive quarter of accelerating growth. While specific figures for the bottom-line forecast were not disclosed, there’s a strong likelihood that the company will maintain its robust growth trajectory for adjusted earnings per share (EPS), potentially achieving triple-digit growth rates once more.
Analysts share a positive outlook for Nvidia’s performance over the full year. They expect the company’s revenue to expand by a commendable 65%, indicating a solid uptick. Moreover, the forecast for adjusted EPS growth is even more impressive, with expectations reaching a notable 147%. This optimistic projection underscores the market’s confidence in Nvidia’s ability to sustain its growth momentum and deliver substantial returns.
The one reason to sell Nvidia: Its valuation
While Nvidia’s forward price-to-earnings (P/E) ratio of 60 may appear reasonable considering its rapid growth, a closer examination uncovers potential concerns. With an enterprise value of $1.16 trillion, Nvidia’s current trading positions it at a multiple of 26 times this year’s sales. In comparison, AMD and Intel are valued at significantly lower multiples of 7 and 3 times this year’s sales, respectively.
These valuation disparities warrant attention due to their implications. It’s essential to acknowledge that even the slightest indications of an “AI bubble” bursting, unforeseen competitive pressures, or a more prolonged growth deceleration could substantially impact Nvidia’s stock. This vulnerability stems from the possibility of a substantial correction. A reflection on the historical performance of companies like Zoom and Snowflake serves as a cautionary example of how rapidly investor sentiment can shift when revenue growth cools off, leading to a significant decline in stock value.
In summary, while Nvidia’s performance is robust, it’s crucial for investors to be cognizant of the potential risks associated with its current valuation, considering the experiences of other hypergrowth companies in the past.
Is it the right time to buy Nvidia stock?
Nvidia’s business is showing no signs of slowing down, indicating that maintaining an optimistic outlook is prudent, even when considering its elevated valuation. In straightforward terms, I believe that Nvidia remains a compelling investment opportunity. However, it’s important for investors to brace themselves for potential short-term fluctuations, especially if the AI market experiences a slowdown in demand.
