Nvidia (NASDAQ: NVDA) has been one of the hottest companies of 2024, with its share price skyrocketing over 120% in the past year alone. The graphics chip maker has become the poster child for the AI revolution, as its powerful GPUs have proven essential for training and running large models. But after such an impressive run, I suspect many investors are wondering: where does this giant of the NASDAQ Composite index go from here?
Can the momentum continue?
The positive case here is actually fairly straightforward. The AI boom could still be in its early innings, and the firm remains uniquely positioned to capitalise on it. The latest quarterly results certainly support this view. Revenue more than doubled year-on-year to $30.04bn, while earnings per share surged an eye-popping 419%.
With OpenAI, Microsoft, Google, and others continuing to invest heavily in AI infrastructure, demand for cutting-edge GPUs shows no signs of slowing down. Many analysts argue that at a price-to-earnings (P/E) ratio of 55, and a price-to-sales (P/S) ratio of 30 times, the valuation is relatively justified given its growth trajectory and dominance in AI chips. The recent launch of its next-gen Hopper and Blackwell AI platforms could drive the next leg up.
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On the flip side, there are those suggesting that much of the future growth is already reflected in the current share price. The meteoric rise has pushed the market cap to a staggering $2.9trn. This makes it the third most valuable company in the world, behind only Apple and Microsoft.
There are concerns that the chip market could face oversupply issues in the coming years as competitors like AMD and Intel ramp up production. This could put significant pressure on profit margins and growth rate. As history has shown, the cyclical nature of the semiconductor industry is another major risk to be conscious of. When investor enthusiasm fades, the share price can move just as quickly in the other direction.
However, I’m most concerned about the geopolitical tensions between the US and China. Export restrictions on advanced chips could seriously impact sales to Chinese customers.
An important few months
In my view, the share price is likely to remain pretty volatile in the near term as the market digests its massive run-up and debates its valuation.
However, I believe the long-term outlook remains bright. The company’s technological leadership, strong execution, and exposure to multiple growth markets beyond just AI (gaming, automotive, etc.) should allow it to grow into its valuation over time.
Analysts are projecting annual revenue to grow 85% to $108bn by next year, with earnings rising 70% to $12 per share. If management can meet or exceed these lofty expectations, it could easily drive the shares to new highs.
That said, I expect returns to moderate at some point. A more realistic target might be 20%-30% annualised returns over the next few years, assuming the company can maintain its competitive edge and AI momentum persists. So while the current Nvidia share price gives me some pause, I believe the company’s growth prospects and industry positioning justify a premium. I’ll be buying shares at the next opportunity.
