With a price increase of no less than 24,000% in the past ten years, Nvidia (NASDAQ: NVDA) has been a life-changing investment for long-term shareholders. But past performance is no guarantee of future results, and investors buying stocks now are buying at the top of a mountain. What could happen in the next twelve months have inside shop for this rising chipmaker?
The first quarter profit figures were a hit
While Nvidia’s parabolic stock price chart may give the impression that the company is in a speculative bubble, that is not the case. The company’s fundamentals have justified the rally, as have its first-quarter fiscal 2025 results showed that the exceptional growth continues.
In the period ending April 28, revenue grew 262% year over year to $26 billion, driven by relentless demand for Nvidia’s high-end graphics processing units (GPUs) — the variety used to run and train artificial intelligence (AI) models. These chips are expensive, and so is the demand exceed supply, giving Nvidia incredible pricing power. The company’s gross margin increased to 78.4% – an increase of 2.4 percentage points from the previous quarter and 13.8 percentage points year over year.
Nvidia essentially sells physical hardware at software-level margins. The rising gross margin suggests the arrival of competing GPUs from similar competitors Advanced micro devices does not put much pressure on its market share.
Over the next twelve months, AI chips based on Nvidia’s new Blackwell infrastructure (designed to train AI algorithms faster and with greater energy efficiency) will expand the company’s technological lead and enable the company to expand its already incredible maintain (or even grow) pricing power.
Expect more profit and value returned shareholders
It should come as no surprise that Nvidia’s impressive revenue growth has led to equally impressive top-line results. In the first fiscal quarter, net income rose 628% year after year to $14.9 billion. And the company is getting more serious about returning some of this value to shareholders: It increased its quarterly dividend by 150% from $0.04. per part to $0.10 per share.
Admittedly, that yields a trivial return of only 0.02%. But Nvidia also returns value through share buybacks. The company has authorized a sum of $25 billion buy back shares end of 2023, which will (albeit minimally) reduce the number of shares outstanding and increase their fundamental value relative to future earnings and cash flow.
In the coming year, investors can expect Nvidia management to attempt to return more capital to shareholders, although future buyback authorizations will be controversial as the stock price is near record highs.
Is Nvidia the next Cisco?
While Nvidia stock itself isn’t in a bubble, the underlying demand driving growth (the generative AI industry) could be. Renowned tech sector investor Cathie Wood compares the company to Cisco — an Internet hardware provider that boomed during the dotcom bubble before crashing as the tech sector deflated in the early 2000s.
Although the Internet ultimately became one of the biggest technological megatrends of our lifetimes, it did not take off as quickly as investors initially expected. And Cisco was never able to regain the high valuation it enjoyed during the peak of the bubble. Nvidia could face a similar risk if the software side of the AI industry doesn’t live up to expectations.
According to The Washington Post, AI chatbots still lose money on every search due to their high training and operational costs. While demand for AI hardware is high now, it is unclear how long the market can remain high if the consumer-facing software side of the industry does not increase dramatically over the next twelve months.
The stock still looks good, but isn’t getting greedy
While it may be hard to believe, Nvidia stock is still relatively affordable. Trading at one forward price-earnings ratio ratio of 42, it is slightly higher than the technology-heavy one NASDAQ-100‘S average 32. And this is a small price pay for a company growing at a triple-digit rate.
That be saidInvestors should not get carried away. In the coming year, Nvidia’s Comps will get a lot more difficultand its valuation will be more difficult to justify on a growth basis. The consumer-facing AI software industry will need to do the same start showing more results to get the enormous amount of capital being cast in Nvidia’s hardware.
Although Nvidia stock still appears capable of outperforming the S&P500investors should ensure they diversify their portfolios.
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices, Cisco Systems, and Nvidia. The Motley Fool has a disclosure policy.
Where will Nvidia stock be in 1 year? was originally published by The Motley Fool
