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Nvidia (NASDAQ:NVDA) has made great progress. The company has returned 247% in the past year and 1,921% in the past five years, surpassing its $2 trillion valuation. When stock prices grow this quickly, it’s easy to wonder if we’re in the middle of a bubble. I recently wrote an article discussing the impending crash of super microcomputers (NASDAQ:SMCI) in stock, but the same catalyst does not exist at Nvidia. I’m bullish on his Nvidia stock and believe it can continue to rise.
This stock didn’t come out of nowhere.
Nvidia was a major chipmaker for several years before the AI boom made the stock huge. In the company’s fiscal year 2023 (ending January 2023), sales slowed significantly and net profit growth was negative compared to the same period last year, raising questions about the company’s valuation. These numbers are a significant change from the strong financial position seen in FY2022.
Data centers have not always been a major growth segment. Gaming used to be the company’s largest division and continues to perform well. Professional visualization and automation also generate hundreds of millions of dollars in revenue each.
Even amid the company’s weak fiscal 2023 performance, data center revenue grew 41% year over year. The company then had a historic 2024 fiscal year with 217% year-over-year growth in data centers compared to fiscal 2023. Additionally, net income increased 581% year-over-year.
Financial growth justifies valuation
While its 238% increase over the past year may raise eyebrows from skeptical investors predicting a bubble burst, NVIDIA’s net income exceeded its total stock return for the year. Due to high growth in net income, the forward P/E ratio was 33 times and the 5-year forward P/E ratio was 1.26 times. These valuation metrics may make it easier to justify the stock’s current price.
As the stock price rises, the net profit margin also rises rapidly, reinforcing the bullish outlook. NVDA’s net profit margin expanded from 28.41% in Q1 FY24 to 55.58% in Q4.
More profits could help keep the stock price at current levels, while also giving it more room for growth. Nvidia is at the center of artificial intelligence, and businesses are rushing to take advantage of this technology.
AI growth will eventually slow down
Nvidia achieved 265% YoY revenue growth in Q4 FY24. In addition, revenue in the company’s large data center division increased 409% year-over-year.
Nvidia’s guidance suggests continued growth through fiscal 2025. The company expects first quarter 2025 sales of $24 billion (plus or minus 2%). Using the midpoint, Nvidia projects quarter-over-quarter growth of 8.6%.
This growth rate is slower than the 22% quarter-over-quarter growth that NVIDIA experienced at the end of fiscal 2024. However, $24 billion is approximately 233.8% higher than fiscal 2024 Q1 revenue. This is a significant year-over-year growth rate. Based on recent trends, Q1 FY25 net income growth should exceed 233.8% YoY.
Still, NVIDIA stock could adjust to slower growth if the company delivers a forward P/E of 33x. The lower the P/E ratio, the greater the stock’s margin of safety against industry contraction.
It is also important to consider what a slowdown in growth will look like. Expected sequential growth is 8.6%, slower than in previous quarters. Multiplying this growth rate over four quarters gives an annual growth rate of 39.1% (1.086^4).
Is NVDA stock a buy, according to analysts?
Many analysts praise Nvidia’s stock and believe it has the potential to rise further. The stock has a “strong buy” rating, including 38 “buy” ratings and 2 “hold” ratings. There are no analysts who rate the stock as a “sell”.
NVDA’s average price target of $881.52 implies an upside potential of 13.5%. However, the high price target of $1,200 suggests that Nvidia could rise more than 50% from current levels. If Nvidia hits this price target, it could become his $3 trillion company and the most valuable company on the stock market.
Nvidia Stock Conclusion
Nvidia is drawing attention to any stock that has a slight correlation to itself and artificial intelligence. Some AI stocks soared a few weeks ago, but there was no news other than that Nvidia owns the stock. There’s no question that Nvidia is a leader in the artificial intelligence industry. The company took advantage of the opportunity to grow rapidly and surpassed the market capitalization of many tech giants.
Despite the big rally, Nvidia is still a “buy” in my opinion due to its strong revenue and net income growth. The company’s valuation is attractive at 33x forward P/E, and if NVIDIA continues to have strong financials, this value will continue to improve.
The days of stock gains of 200% or more in one year are probably over. However, Nvidia is still well-positioned to outperform the stock market.
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