With global demand for its microchips and semiconductors accelerating, and the development of AI in its infancy, Nvidia (NASDAQ:NVDA) stock remains a must-own growth play that can carry investors to future riches.
As we close out 2023, the company’s share price has more than tripled since last January, bringing its five-year gain to more than 1,000%. The company achieved a $1 trillion market capitalization earlier this year, and analysts see more runway ahead. The median price target on the stock is 35% higher than current levels. Investors who don’t yet have a position in Nvidia stock would be smart to get one now.
A Closer Look at NVDA Stock
The numbers being put up by Nvidia through its quarterly financial reports are astounding. Few if any other companies are growing at such a fast rate. The company’s most recent print for what was its fiscal third quarter contained some mind-boggling stats.
Revenues in fiscal Q3 rose 206% from a year earlier to a record $18.2 billion. Net income for the quarter came in a $9.2 billion, a 13 times increase over the last year, while net profit margins expanded to a record 51%.
Looking ahead, Nvidia projected revenue for its current fiscal fourth quarter of $20 billion, which represents 231% year-over-year growth.
All of this is being driven by huge demand for its microchips and semiconductors that are used to power complex AI models and applications. In recent weeks, Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and privately held OpenAI have each announced plans to start making their own AI microchips in house simply because they can’t get enough Nvidia chips.
Against this background of skyrocketing global demand, Nvidia recently launched its most powerful microchip yet, the “GH200 GPU,” which has more memory than its current H100 chip and an additional processor.
The company is already seeing huge demand for the new GH200 GPU chip, and it is expected to further drive sales and profits into 2024 and beyond.
Attractive Valuation
One of the many benefits of Nvidia’s record breaking financial results and enormous growth is that it has pushed the company’s stock valuation lower. In fact, NVDA stock has the most attractive valuation of the so-called “Magnificent Seven” securities.
Nvidia’s shares currently trade at an earnings-per-share multiple of around 23 times its 2024 earnings forecast, and 20 times its forecasted earnings for 2025. That makes Nvidia a cheaper stock to buy than either Apple (NASDAQ:AAPL) or Microsoft.
Nvidia’s current valuation puts it in line with the average price-earnings ratio of stocks listed on the benchmark S&P 500 index.
For a company of Nvidia’s size and growth, the current valuation makes it look cheap, especially when compared to other mega-cap tech stocks. There’s also an opportunity to buy NVDA stock right now as the share price has retreated about 5% since its recent earnings.
Some analysts blame the pullback on the stock’s growth being fully priced into the share price; others point to China.
The China Issue
If there’s one cloud hanging over Nvidia right now, other than pressure to meet demand for its technologies, it is China. NVDA stock took a hit earlier this fall when the Biden administration announced export controls on microchips and semiconductors from American companies.
The White House is trying to prevent China from accessing advanced western technologies for fear that the government in Beijing will use them to enhance their military capabilities.
For Nvidia, which derives 25% of its annual revenue from the Chinese market, the export controls have proven to be a problem.
Fortunately, the chip maker appears to have found a way to continue selling its high-end microchips and semiconductors to Chinese companies without violating U.S. laws.
Nvidia has announced plans to sell less powerful versions of its microchips to domestic manufacturers in China. The chips sold to China only have about 50% of the computing power of the company’s top tier H100 chip.
The new low powered chips comply with U.S. export restrictions pertaining to China. Nvidia is also continuing to sell microchips to China that are used in electric vehicles that are being developed in the nation of 1.4 billion people.
There were recent media reports that Nvidia plans to delay the rollout of its new AI microchips for China until the first quarter of 2024. But this appears to be a very near-term problem that shouldn’t impact Nvidia’s long-term growth or share price appreciation.
Buy NVDA Stock
There’s an argument to be made that Nvidia is the most consequential company and stock of 2023. Certainly, no other company has contributed more to the AI revolution than Nvidia. And few stocks have benefitted as much from the market mania surrounding AI.
However, Nvidia has the financial results to justify its enormous share price appreciation. And its valuation looks attractive as a result. With more upside and growth ahead, investors would be foolish to sit out the rally. NVDA stock is a buy.
On the date of publication, Joel Baglole held long positions in NVDA, MSFT and AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
