… (+) Visitors check out Nvidia’s AI technology at the 2024 Apsara Conference in Hangzhou, China on September 19, 2024. (Photo by Costfoto/NurPhoto via Getty Images)
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Is it possible for Nvidia stock to reach $200 in the next two years?I think it is possible. how? Consider that just about nine months ago, he was at the end of December 2023, and NVIDIA stock was trading at a level of about $50. This year, the stock has more than doubled since then and currently trades at nearly $116. Looking at valuation, Nvidia stock has a P/E ratio of approximately 95 times. Is this expensive? not much. Especially given the company’s steady revenue growth, the artificial intelligence market’s long growth runway, and his Nvidia’s commanding lead in the accelerated computing market. The Fed’s recent interest rate cuts could also provide a tailwind as investors seek growth opportunities in a low-rate environment. The scenario below uses Nvidia’s revenue, profitability, and valuation multiples to illustrate its potential path to a stock price of $200.
Rate cuts and shift to multimodal model boost earnings
Nvidia’s revenue has nearly tripled in the past 12 months, with an average annual growth rate of about 55% over the past three years, and it’s likely to maintain that momentum. If Nvidia grows sales at an average annual rate of more than 60% over the next two years, sales will increase from about $61 billion in his fiscal year 2024 to about $155 billion by fiscal year 2026, or more than 2.5 times. Possibly.
There are several trends that could drive continued growth. While early AI models introduced by OpenAI and others in 2022 were primarily text-based, models have become increasingly multimodal, handling audio, images, video, and 3D, and using higher computing power and More GPU shipments are required. Moreover, unlike a decade or so ago, when advances in computing power, especially processors, were outpacing development software that could fully utilize that power, in the AI era, machine learning’s demanding computational requirements have meant that computing power demand is rapidly increasing. model. This trend is likely to continue strong demand for Nvidia.
Additionally, last week’s monetary easing by the Federal Reserve could provide further tailwinds for NVIDIA. The Fed’s 0.5% rate cut last Wednesday was the first rate cut in about four years. See our analysis of other ways to profit from the Fed’s next move?The benchmark federal funds rate remains at 4.75-5% after the cut, and there is still room for the central bank to cut rates further. It remains. Lower discount rates are typically more profitable for growth sectors such as technology because lower discount rates increase the present value of future earnings. These sectors have higher potential for out-of-period returns. Lower interest rates are particularly beneficial for Nvidia. why? Lower interest rates would reduce financing costs for large data center builders, potentially increasing capital spending in the sector and helping companies like Nvidia that sell GPUs for servers. . Additionally, the economics of the AI revolution remain complex given the high costs of model training and inference. Lower interest rates may improve the financial viability of these investments.
Currently, the stock market is often short-sighted and tends to extrapolate short-term trends into the long-term. In Nvidia’s case, the assumption is that demand growth and pricing power will be maintained to maintain substantial margins as the wave of generative AI progresses. However, there are multiple risks and a significant stock price correction remains possible. We discuss this possibility in more detail in his analysis of Nvidia’s downside to $40. In fact, we believe this wide range of upside and downside potential reflects the simple fact that NVIDIA is a volatile stock.
Nvidia has already done it in the past
To put things into perspective, NVDA stock has risen over 800% from the $13 level in early January 2021 to around $130 today. In comparison, the S&P 500 has risen about 50% over the past four years. The stock price return in 2021 was 125%, in 2022 it was -50%, and in 2023 it was 239%, so it was a turbulent situation. His 2022 underperformance of NVDA stock and the S&P 500 as a benchmark index is particularly striking. The return that year was -19%. Notably, Trefis’ High Quality Portfolio of 30 stocks has outperformed the S&P 500 every year over the same period. why is that? As a group, Headquarters portfolio stocks carried less risk and delivered better returns compared to the benchmark index. It’s not been a roller coaster ride, as evidenced by the performance metrics of our corporate portfolio.
High-end products should maintain high profit margins
Couple this solid revenue growth with the fact that Nvidia’s profit margins (net income, or profit before expenses and taxes, calculated as a percentage of revenue) are on an improving trajectory. That share will rise from around 25% in FY2019 to around 49% in FY2024, as the company sees improved economies of scale and a more favorable product mix skewed towards complex data center products. Increased. Software-related sales are also on the rise. We can assume that margins will remain flat at current levels as the launch of more expensive high-end products such as Blackwell chips by Nvidia is offset by potential competitive pressures.
Strong performance means smaller contraction in profit multiples
Now, if earnings grow 2.5 times, assuming the stock price remains the same, the P/E ratio will shrink from 2.5 times to about 40 times. But that’s exactly what NVIDIA investors are betting won’t happen. If earnings expand to his 2.5x over the next few years, a scenario where the P/E metric stays at around 65x becomes very likely, rather than the P/E ratio shrinking from the current around 95x to around 40x. Masu. This gives him a realistic chance of seeing Nvidia stock grow by about $200 over the next two years or so. What will be the duration of this high revenue scenario? Actually, it doesn’t make much of a difference whether it takes 2 years or 3 years, and as long as Nvidia maintains its profit margins and stays on this revenue growth trajectory, so will the stock price. may react to.
Comparison of NVDA returns and Trefis enhanced portfolio
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