NVIDIA: Is the Company Truly Overvalued?
A full discussion of NVIDIA’s investment potential
Introduction
NVIDIA has been all over my news feed, constantly breaking new highs and beating earnings targets, forming an undeniable “hype” surrounding the company. However, with this appreciation in stock price, many investors have begun to believe the stock is overvalued. With NVIDIA’s 10% drop in stock price though, questions on the viability of NVIDIA as a good long-term investment must be answered. And I still believe that NVIDIA has room to grow, even given the currently high value of the stock.
Company Overview
Founded 1993 by Jen-Hsun Huang, Chris Malachowsky, and Curtis Priem, NVIDIA has established itself as the central graphics chip provider in the world. From office work to high end gaming and artificial intelligence, Nvidia has it all. Despite high saturation of the chip market, Nvidia skyrocketed to the spotlight with the release of their GeForce products. With their newfound success in these new GPUs, Nvidia then sought to expand their horizons by developing certain programming languages like CUDA(similar to C++) to allow individuals to directly program code into the GPU itself, boosting each computer’s capabilities.
Growth Catalysts
- An obvious advantage of NVIDIA is its versatility. With its ability to create a wide range of products, it’s easy to say that their potential to expand upon their production possibilities and into new markets is immense. Some of these markets include autonomous vehicles, GPT software (Nvidia is a big manufacturer for AI accelerators), drones, healthcare, and more.
2. Another advantage — as many of you would have already guessed — is gaming. Nvidia continues to dominate the gaming market which is still undergoing constant growth. With increasing demand for high quality visuals and graphics, Nvidia stays the most trusted GPU manufacturer.
3. Another expansion opportunity is “The Cloud”. As data centers are constantly growing at a rapid rate around the world for different enterprises(Apple, Microsoft, etc.) the demand for Nvidia’s high-quality GPUs and tech resources are on the rise as well. In these markets, Nvidia’s powerful GPUs and AI manufactures are essentials for productivity and efficiency.
4. A more obscure one is expansion into the Augmented and Virtual Reality Space. AR/VR are on the rise not only for entertainment but also as new resources and infrastructure for work around the world. To maintain the quality and develop new tech, Nvidia’s GPUs are a necessity. NVIDIA’s GeForce RTX series displays dedicated ray tracing cores to create immersive graphics all the while keeping frame rates at a steady rate.
Financial Analysis
Within the past year, Nvidia’s revenue, profitability, and stock have all increased recently with a reported $15.22 billion in Q2 2024, up 44% from Q2 2023. Along with this, Nvidia’s net income increased from $1.67 billion Q2 2023 to $7.58 billion Q2 2024, playing a big part in NVIDIA’s stock price appreciation throughout 2023 and 2024. Nevertheless, among Nvidia’s great successes within the past years, they have experienced some but few impeding factors. Nvidia faced antitrust and regulatory issues specifically in their ARM acquisition attempts along with GPU sale fluctuations and margin compressions with increasing costs and competitive pricing. QoQ (quarter-over-quarter) from Q1 2023 to Q1 2024, Nvidia’s gross margins decreased from 65.2% to 62.3% along with this, in response to outside pressure Nvidia was forced to decrease prices for some GPU models including the RTX 4080.
For specific valuations, Nvidia sits at a current P/E ratio of 55.78x which is 44% less than the five year average of ~80x. Furthermore, many investors are forecasting for NVIDIA to grow in earnings and revenue by around 21% in the future alongside Nvidia’s prediction to gain $28 billion in the next quarter.
Risks
- Volatile Market: Because NVIDIA operates in a super competitive market, the intensifying competition with formidable rivals like AMD and Intel makes it harder to be able to consistently outperform and stand out.
- Supply Chain Dependence and Disruptions: Because NVIDIA outsources their manufacturing to third parties, any disruption to the third party and the supply by geopolitical conflict or natural disaster or any other source could potentially lead to major problems with the manufacturer and customers not receiving their demand.
- Legal and Regulatory Limits: As previously mentioned, NVIDIA’s failed acquisition of ARM holdings brought out antitrust issues and legal rights creating a whole new set of risks for investors and problems for the company. Additionally, like many other companies face, Nvidia also faces intellectual property disputes which could result in litigation and high repayment costs.
- Rapid Tech Advancements + Cybersecurity Threats: The tech world is growing, and it is growing fast. With many new ideas being developed, tech being made, and demand by consumers going through the roof, Nvidia has to stay at the forefront of the industry. However this takes time, resources, and money which are all difficult to acquire, and on top of that, with the growing innovations, there are also growing cybersecurity threats which could potentially harm the company in different manners. But nonetheless, every tech company faces cybersecurity issues, so it is crucial to keep them in mind but also not so much that they impede on your goals.
Conclusion
While Nvidia has shown immense growth in revenue and earnings, I have also seen high costs and fluctuations in sales. I remain bullish about NVIDIA; their new innovations in the AI world seem to be making profits and collaborations in different industries diversifying their portfolio creating much more room to grow in the future.
Thank you for reading our (updated) NVIDIA analysis!
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