Nvidia shares rose in early trading Friday, keeping pace with the stock for a modest gain in November, as investors walk away from the tech giant's recent earnings report and assess its leading role in the ai and trading. its broader place in an expected bull market next year. market.
NVIDIA (NVDA) has been the single biggest beneficiary of the ai boom, which began with the launch of OpenAI's ChatGPT chatbot in November 2022, thanks to demand for its next-generation chips and processors that power training and inference of ai systems. World's largest ai.
Investors are betting big that ai will prove to be a transformative technology equal to or greater than the birth of the Internet in the late 1990s, and have added a collective market value of $8 trillion to the six largest technology stocks in the last two years.
Nvidia, for its part, has pocketed $2.9 trillion of that profit, propelling it from a mid-sized gaming chip maker to the world's most valuable company with a market value of $3.48 trillion, a level that is just below the total value. of the British FTSE 100 benchmark index of the largest companies in Europe.
However, it is from those heights that investors will see that group's next financial year, which begins in February, and the revenue prospects for its flagship product, the Blackwell line of processors, which is effectively considered the “iPhone of the ai.”
Blackwell is faster, more efficient, and uses less power than Nvidia's legacy line of Hopper chips, and is therefore tied to seemingly insatiable demand from the world's largest hyperscalers, such as Microsoft. (MSFT) amazon (AMZN) Metaplatforms (GOAL) and Alphabet, Google's parent company (GOOGLE) .
Wall Street analysts expect Blackwell sales to add “several billion” to Nvidia's revenue in the fourth quarter, before accelerating to around $62 billion in 2025 and $97 billion the following year. .
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Profits from the market-leading chips, which are the real heart of the ai investment theme, are expected to be equally impressive, and even with the costs associated with ramping up production, Nvidia will likely produce gross margins in the low range. 70% over the next year. first half of next year, with a forecast of around 70% for the last six months.
$100 billion profit target
To put that in context, Nvidia reported net income of $4.37 billion in the fiscal year that ended in January 2023 and included the launch of ChatGPT. By the end of the next fiscal year, that figure is expected to rise to $102 billion.
What might be even more surprising is the fact that for all the expected growth Nvidia stock is valued at, it's actually not that expensive compared to its Magnificent 7 peers.
Nvidia is trading at a multiple of 46.3 times its 12-month earnings forecast, a level that is only modestly above the 40.7 times multiple associated with amazon and the staggering 136.5 times multiple associated with Elon Musk's Tesla. . (TSLA) .
Related: Goldman Sachs Analyst Leads Nvidia Price Target Revisions After Earnings
It's also a cash cow with very little debt, leaving plenty of room for share buybacks that reward investors for their longer-term views. Nvidia is likely to generate $62 billion in free cash flow in its next fiscal year, according to GimmeCredit analyst Dave Novosel, of which about $36 billion will be reserved for share buybacks.
That doesn't mean it's bulletproof, of course, and investors have reacted cautiously to its fiscal third-quarter earnings report earlier this month, which showed a slowing revenue growth rate and a moderation. of profit margins, although perhaps discounting the impact of tariffs and technology. sectoral trade barriers expected from the incoming administration of President-elect Donald Trump.
Trade war concerns
Nvidia, which guides investors on revenue and profit forecasts only for the next quarter, beat Wall Street estimates by just 1.5% for its end-January revenue figure of $37.5 billion.
That compares with forecasts, compared to Street estimates, of between 5% and 20% over the past two years.
On the tariff front, Nvidia is susceptible, as the world's largest company, to finding itself at the center of a technology trade war between Washington and Beijing now that Trump has promised to impose heavy tariffs on Chinese imports as well as technology companies. nascent. production centers in Mexico, shortly after taking office in November.
Related: Nvidia earnings tighten chances of record year in S&P 500
Reuters reported earlier this week that Nvidia Vice President of Global Field Operations Jay Puri met with China officials as President Joe Biden prepares new restrictions on technology exports, which are expected to be extended under Trump, who They could trigger retaliation from Beijing that disrupts global supply chains.
However, CEO Jensen Huang seemed confident his company would find a way out of the trade war during an academic event in Hong Kong last week.
'Unique opportunity'
“Open science in global collaboration… has been around for a long time,” he said at an event at the Hong Kong University of Science and technology. “I don't know what's going to happen under the new administration, but whatever happens, we will simultaneously balance compliance with laws and policies, continue to advance our technology, and support and serve customers around the world.”
Still, Nvidia shares have fallen about 7% since its October quarterly report, compared with a modest 0.5% gain for the Nasdaq and a 1.4% advance for the S&P 500.
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For Benchmark analyst Cody Acree, however, the business and performance headwinds won't undermine what he sees (Nvidia stock's) “compelling value for thoughtful investors willing to look beyond the near-term noise.”
Acree, which has an “overweight” rating with a $190 price target, calls the selloff “an opportunity in the industry's most unique investment property that is a critical key to the early stages of transformative ai.” the way we, as people, interact with technology.”
Nvidia shares last rose 1% in premarket trading to indicate an opening price of $136.70 each, a move that would extend the stock's November gain to 2.9% and its advance of the fourth quarter to 12.5%.
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