With a share price just pennies above $475, a market capitalization of $1.17 trillion, and a valuation of nearly 26 times sales, Nvidia (NASDAQ:NVDA) is by some measures one of the most expensive stocks on the planet today.
Yet, Bank of America’s Vivek Arya, a 5-star analyst rated in the top 1% of the Street’s stock pros, described Nvidia not as “one of the most expensive stocks on the planet today” but rather as a stock with a “compelling” valuation.
Rather than highlight the price to sales multiple of the stock — made more palatable by Nvidia’s insanely high profit margins on its sales (42%) — Arya used the opportunity of his report to accent the positives about the stock. For example, Nvidia may be a stock with a high valuation relative to sales, but it’s got a low valuation of only 22 times relative to next year’s earnings. It’s a company with nearly $45 billion in trailing sales, but also with at least a $250 billion total addressable market for its semiconductor chip products (and therefore, the potential to quintuple its sales).
More than that, Nvidia is a company executing on its market opportunity, and expected to grow both its sales and its earnings by 55% to 60% next year.
How will Nvidia do that? In contrast to years past, when Nvidia had a “cadence” of introducing new chips about once every two years, Arya says the company now plans to introduce new chips annually over a “multi-year” period. In demonstration of which, the analyst points out that Nvidia is already gearing up to introduce a new H200 chip to replace its flagship H100 chip. And it’s preparing to introduce the world’s first commercially available 3nm chip (the B100) later in 2024.
It doesn’t hurt demand for these chips, of course, that Nvidia currently commands a 90% share of the AI training market. Nor that Nvidia is arguably helping to grow the size of this market by boosting artificial intelligence capabilities, such that generative AI computing is now “cannibalizing” (i.e. destroying and replacing) “demand for traditional CPU” chips.
In other words, Nvidia appears to be destroying the semiconductor business model that Intel was built upon, and replacing it with a model of Nvidia’s own making, helping to “sustain NVDA growth into CY25” and beyond.
Well and good, you say. But… what about that valuation of 26 times sales? Isn’t that rather high?
Well yes, it is. But so long as Nvidia can maintain such fabulously high profit margins that its price-to-earnings ratio doesn’t really look very different from its price-to-sales ratio — such that it’s plausible to believe Nvidia might only cost 22 times next year’s earnings — there’s actually a good argument to be made that Nvidia stock is not terribly expensive.
All of which is to say: Keep a sharp eye on Nvidia’s profit margins, investor. So long as they stay in the stratosphere, this stock may actually be as cheap as Arya says it is. But the moment those profit margins start to falter — look out below.
All in all, Arya rates NVDA shares a Buy with a $700 price target. While investors have already seen impressive returns in 2023, Arya’s target suggests the potential for an additional 47% in gains over the next 12 months. (To watch Arya’s track record, click here)
It’s clear that Wall Street generally agrees with the Bank of America’s take on NVDA. The stock has 34 recent analyst reviews, which include 31 to Buy and 3 to Hold, giving the stock its Strong Buy consensus rating. The average price target currently stands at $661, suggesting 39% growth in the year ahead. (See NVDA stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
