The surge in interest in artificial intelligence since the launch of OpenAI’s ChatGPT in November 2022 has impacted numerous industries, with Nvidia positioned at the center of this transformation. As the leading manufacturer of graphics-processing units (GPUs), Nvidia’s chips are critical for AI applications like ChatGPT, Google’s Gemini, and Microsoft’s CoPilot. This demand has driven Nvidia’s revenue and profits significantly higher, resulting in a 171% stock price rally in 2024 alone. However, concerns have arisen over whether Nvidia’s valuation, now exceeding $2.8 trillion, is overextended.
Nvidia’s dominance is evident as major tech companies like Meta Platforms, Microsoft, Google, and Amazon have increased capital expenditures to $230 billion in 2024, up from $144 billion in 2023, with much of this spending directed toward AI infrastructure. Nvidia’s revenue surged nearly fivefold to $130 billion in 2024, prompting the company to reinvest heavily in R&D to fend off competitors like Advanced Micro Devices (AMD) and Broadcom.
Despite Nvidia’s stock price dropping 15% this year due to concerns about slowing AI spending, Bernstein analyst Stacy Rasgon views the decline as surprising. Rasgon highlights that Nvidia is just beginning to ramp up sales of its Blackwell AI chips, which reached $11 billion in the last quarter. With the stock trading at about 25 times next 12 months’ earnings, its valuation is near 10-year lows. Rasgon notes that Nvidia’s price-to-earnings ratio is now below parity relative to the Philadelphia Semiconductor Index (SOX), a rare occurrence over the past decade.
Looking ahead, Blackwell’s sales potential and expected margin recovery could position Nvidia as an attractive investment despite its recent drop. Gross margins, currently at 71%, are projected to rebound to the mid-70% range later this year. Rasgon concludes that Nvidia’s valuation is becoming increasingly appealing, with Bernstein maintaining a $185 price target for the stock.
— news from TheStreet