Wunderkind Nvidia (NVDA), the world’s third-highest valued stock, experienced a material drop in market capitalization following its second-quarter earnings results in late August. However, NVDA shares have shown some strength again and are up 5% over the past week. After temporarily surpassing the $3 trillion mark earlier this year, investors are wondering what the future will bring. My position remains unchanged: I’m bullish on NVDA stock as an investment because of its clear AI supremacy and exponential growth potential.
NVDA’s long-term AI-driven growth trajectory remains intact
NVDA is known to be positioned for a long road to growth, with top customers like Microsoft (MSFT), Alphabet (GOOGL), Meta (META) and Amazon (AMZN) ramping up their AI efforts. Beyond these leading customers, however, Nvidia’s AI penetration is still rising across all sectors, increasing my optimism about NVDA stock. Companies from different industries and regions are eager to integrate AI benefits into their operations. NVDA also continues to enter into partnerships with top companies.
There’s a reason why companies are flocking to NVDA for their AI ambitions. NVDA is not only a leader in AI GPU processors, but also offers a complete end-to-end AI infrastructure that boosts productivity. That’s something few, if any, of its global AI peers can deliver.
NVDA remains a one-stop AI powerhouse with margin growth
Another reason for my optimism about NVDA is the relentless focus of CEO Jensen Huang. He is committed to transforming NVDA into a fully AI-driven data center powerhouse spanning 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, which contributes to steady growth in profit margins. However, critics say 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.
For context, NVDA reported an extraordinary 217% increase in data center revenue for fiscal year 2024. While that growth is expected to moderate to around 130% in 2025, this remains an impressive triple-digit figure, especially considering the strong baseline for fiscal year 2024 for comparison . . Although lower than the current pace, these are still remarkable growth projections for the future. I view analysts’ optimistic estimates as a reason to remain confident in this AI leader, especially as the disruptive potential of generative AI is only just beginning to unfold.
Demand for NVDA’s chips is robust and will boost future revenue in the coming quarters. Therefore, despite some investor concerns, I expect NVDA to continue to maintain its clear AI dominance with an unbeatable competitive position and best-in-class AI products and services.
A review of Nvidia’s impressive quarterly profits
Nvidia posted another stellar second-quarter result on August 28, 2024, driven by accelerated computing and the continued momentum of generative AI. Adjusted earnings of $0.68 per share easily beat analysts’ consensus estimate of $0.65 per share. The figure was much higher (+152%) than the second quarter 2023 figure of $0.27 per share.
The company posted 122% year-over-year revenue growth, bringing in $30.04 billion for the three months ended July 31, exceeding analyst expectations. Importantly, revenues from Data Center, the company’s crown jewel division, grew 154% year-over-year to $26.3 billion. Additionally, NVDA’s adjusted gross margin increased 5 percentage points to 75.1%, compared to 70.1% a year ago. Many investors were apparently hoping for even bigger numbers, which is why the stock fell slightly after the second quarter report. The shares then continued on a downward trend until reaching their low point on September 6, just above the $100 level.
Nvidia’s expectations for the third quarter seemed less promising to investors, with revenue expected to be around $32.5 billion. The guidance was below expectations. Adjusted gross margins are expected to stabilize at approximately 75%, compared to 75.15% in the second quarter.
Concerns about insider selling at NVDA are over
Insider selling at Nvidia has put downward pressure on NVDA stock in recent months. CEO Jensen Huang sold NVDA shares in multiple trades from June to September, but it’s important to note that these 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 sold more than $700 million worth of 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. Combined, Huang has a ~3.5% stake in the company, with a total of approximately 859 million shares.
NVDA’s valuation is not expensive, given its strong earnings growth
Investors may have been reluctant to buy NVDA stock at current levels, reflecting the stock’s extraordinary price and due to concerns about the company’s growth and slowing growth.
On the contrary, my contention, however, is that NVDA stock is not as expensive as it seems. Currently, it trades at a forward price-to-earnings ratio of around 43x (based on FY 2025 earnings estimates). This is actually cheaper than some of its peers’ valuation multiples. For example, NVDA’s closest competitor and US-based semiconductor company, Advanced Micro Devices, has a price-to-earnings ratio of 46.8x. Interestingly, NVDA’s current valuation still reflects a 10% discount to its five-year average forward price-to-earnings ratio of 47.3x.
Given NVDA’s consistent outperformance and strong growth potential, the current valuation seems reasonable and justified. Any future dip in the stock price could represent a solid buying opportunity in my opinion, especially given Nvidia’s huge potential in the fast-growing AI market.
Is NVDA Stock a Buy or a Sell According to Analysts?
With 39 Buys and three Hold ratings from analysts in the last three months, the consensus TipRanks rating is a Strong Buy. Nvidia’s average share price target of $152.44 implies a potential upside 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 in the past year, compared to a gain of about 37% for the Nasdaq 100. The post-earnings sell-off in NVDA stock was largely driven by profit-taking, in my opinion. After hitting a low of almost $100, the stock now appears to be in recovery mode.
In the short term, I think continued economic and political uncertainties could keep the stock price in check. However, I view every dip as a buying opportunity. I see NVDA as a strong long-term investment given AI’s significant enduring potential.
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