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Yesterday, The Wall Street Journal reported that the federal government is considering increasing restrictions on the sales of artificial intelligence (AI) chips to China. As a result, shares of Nvidia (NVDA) opened lower this morning. However, investors don't seem overly concerned as the stock has rallied and is currently down less than 1% on the day.
The tech-heavy Nasdaq 100 ($IUXX) continues to do well in 2023, but there are few tech stocks out there that have done as well as graphics processor Nvidia. Shares of the tech stock are up 184% year-to-date, and 279% from 52-week lows.
Nvidia stock has kept investors and analysts happy over the last year, crushing earnings estimates during the last few quarters. During its latest earnings report for the first quarter of fiscal 2024, there were several points that caught the eyes of analysts and investors alike. But here's the thing: it may just be that the best is yet to come for Nvidia stock.
Record earnings receive record results
During the first quarter of 2024, Nvidia stock reported quarterly revenue of $7.19 billion. This was a 19% increase from the quarter before, achieving record data center revenue of $4.28 billion as well. However, the second quarter is projected to be even better, the company stated. The outlook now looks like it will hit $11 billion, according to Nvidia.
Now granted, it's important to note that while the quarter was up, year-over-year there is still work to be done. Nvidia stock saw revenue drop 13% from the year before, and it continues to increase their supply in hopes of increasing revenue to meet “surging demand.”
The earnings report saw shares of Nvidia stock jump 25% in a day, with more expected to come from one area that continues to hold the attention of investors.
Artificial Intelligence could lead to more share surges
Nvidia stock in their earnings report gave particular attention to generation artificial intelligence and its use by their company. The Chief Executive Officer and founder of Nvidia stock Jensen Huang stated this is where the company will be putting their laser focus to next.
“The computer industry is going through two simultaneous transitions — accelerated computing and generative AI," he said during the report. “A trillion dollars of installed global data center infrastructure will transition from general purpose to accelerated computing as companies race to apply generative AI into every product, service and business process."
This is a major market, and one that Nvidia stock has already started to integrate. AI is used to manage workflow, customize, and perform specific tasks for businesses by Nvidia stock so far. Yet there is certainly more room to grow, with the AI market currently worth $136.55 billion as of 2022, according to Grand View Research, and is expected to grow at a compound annual growth rate (CAGR) of 37.3% between now and 2030.
Nvidia has already identified this as a path to success, partnering with companies such as Snowflake (SNOW) to use AI and keep cloud-based data safe. But the question remains, is all of this already found in the share price now at $415? Or is there still value to be had?
Where Nvidia stock stands today
The major benefit that Nvidia stock has is that it continues to corner the graphic processing units (GPU) market. It provides these GPUs so that the basics of computing can be done in everything from the electric vehicles run by Tesla (TSLA), to ChatGPT. According to the latest Jon Peddle Research on Nvidia, the stock still holds about 71% of the market share of GPU, with no other company even coming close. GPUs still make up about 50% of the company's revenue at this point, but the expansion into data centers and AI have certainly led to more planned success for the company.Still, it's not likely to be smooth sailing for the company. As mentioned earlier, the federal government has indicated there might be more restrictions on the export and sales of AI chips to China, leading to a dip in AI stocks. About 10% - 15% of Nvidia's revenue comes from China, so this does have the possibility to effect the earnings power of the company.
According to Colette Kress, Nvidia's Chief Financial Officer, the reported new restrictions on the export of AI chips to China are not anticipated to have an immediate significant effect on the chip company. However, she cautioned that these limitations would have a detrimental impact on their business in the long term. Kress said, "Over the long term, restrictions prohibiting the sale of our datacenter graphic processing units to China, if implemented, would result in a permanent loss of opportunities for the U.S. industry to compete and lead in one of the world’s largest markets and impact on our future business and financial results."
Evercore ISI's C.J. Muse doesn't believe that this would be a ‘big deal’ for Nvidia. Muse wrote in a note to clients, “There are zero details set in stone today as a decision is still being mulled over and chipmakers are reportedly pushing back to ease restrictions -- so it is clearly too early to have a definitive view of the impact one way or another.”
Overall, analysts continue to mark Nvidia stock as a “strong buy,” with 33 analysts weighing in on the future of the stock. In fact, the price target now sits at an average of $433.69, with a high at $600. So analysts seem to think there is still plenty of room to grow for the stock. And with the company continuing to come out with positive earnings surprises that have been more than 400% higher than expected, that's not likely to dip.
Nvidia stock also continues to increase its free cash flow, with $2.6 billion on the books during the fourth quarter of 2023. This leaves it open for more growth through acquisitions in the future.
However, compared to its peers, Nvidia stock does certainly look expensive. It currently trades at 185 times earnings, compared to companies like Intel (INTC) that trades at just 43 on the price-to-earnings (P/E) ratio. Furthermore, it certainly looks more volatile than its peers, with a 60-month beta at 1.75, compared to Intel's 0.87.
Bottom line
I believe that if you're saving some cash and putting it aside for retirement, Nvidia stock shouldn't be where you're storing it. However, if you have some cash set aside to put towards long-term investments, then this could certainly be an attractive buy. Overall, the AI market is just ramping up, and Nvidia stock remains the GPU provider for some of the world's largest companies. With that in mind, it's no wonder it's a strong buy for those seeking growth.
On the date of publication, Amy Legate-Wolfe did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
