May 24, 2024 | NVIDIA Could Be The Most Important Stock on The Planet

NVIDIA, the computer chip and artificial intelligence company, announced excellent results this week, pushing the stock to new highs. The company’s share price has tripled from a year ago, making NVIDIA worth $2.5 trillion. Stock traders were pleased with the optimistic outlook expressed by the CEO.

Is Nvidia the single most important stock on the planet?

I wrote about artificial intelligence in June 2023 and mentioned NVIDIA as a leading beneficiary of the growth of AI. Since then the stock of NVIDIA has tripled from about $350 to $1063. You can access the June 2023 post here.

Traders liked the financial results, the forecast outlook for the next quarter and the announcement of a 10/1 split in the stock price, which means a share will be worth approximately $100 instead of a $1000.

The gross profit margin was forecast as 75%, which means for every dollar of sales received by the company it spends only 25 cents in cost of goods sold. This is an absurdly high margin, signalling excess demand and limited supply. This will last as long as Nvidia has little or no competition in this niche product and customers are responding to the frenzy around AI.

Sales for the upcoming quarter were estimated to be $28 billion – an annual run rate of $112 billion. The valuation at $2.5 trillion is 22 times sales. Very few large companies have ever reached this level of valuation.

Jensen Huang, founder of NVIDIA said in the earning release: “The next industrial revolution has begun — companies and countries are partnering with NVIDIA to shift the trillion-dollar traditional data centers to accelerated computing and build a new type of data center — AI factories — to produce a new commodity: artificial intelligence.”

He continued, “Our data center growth was fueled by strong and accelerating demand for generative AI training and inference on the Hopper platform…. generative AI has expanded to consumer internet companies, and enterprise, sovereign AI, automotive and healthcare customers, creating multi-billion dollar vertical markets.”

The company is now trading at 160 times earnings, down a bit from the ratio in June 2023, which means earnings have grown faster than the share price.

Today computer chips for large data centers is the only business that matters at the company. There is talk of new AI chips for the PC market, but nothing has been announced yet.

More than 40 percent of NVDA’s revenue comes from just four companies; Microsoft, Meta, Amazon and Alphabet. They are working on making their own chips. Tesla is also a buyer of NVDA’s chips.

One analyst suggested that earnings could soar to $25 per share by 2026, which makes the current price of $1000 per share only 40 times earnings — “reasonable” for a stock of this type.

But on current sales and earnings NVIDIA has surpassed the most extreme valuations in 1999. Then Cisco traded at a P/E of 118. So NVIDIA is 50% more expensive now than CSCO was then.

Caveat emptor.

Hilliard MacBeth

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Hilliard MacBeth May 24th, 2024

Posted In: Hilliard's Weekend Notebook

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