As far as the mega-cap stocks are concerned, none have been as impressive as Nvidia in 2023!
The stock started the year trading at around $145 per share…
Since then, it has reached a high of over $502.
That’s a run of around 246% in less than 9 months!
While these types of moves happen very often in the small-cap space, they are very rare with companies as big as Nvidia.
What’s the reason behind the insane bullish sentiment?
In short, AI…
While this is an indication of massive hype for the company, it doesn’t necessarily mean that it’s grounded in realistic potential.
Here are some key reasons why Nvidia is the real deal!
1.) Insane Revenue Growth
The company reported some insane numbers in Q2…
They reported $13.51 billion in revenue, which is an 88% increase from Q1!
Historically, the company made most of its money from the gaming sector, but this is shifting very quickly…
Data center spending made up the majority of the revenue from Q2, coming in at $10.32 billion. Keep in mind that Nvidia’s total data center revenue for 2022 was around $15 billion!
Strong growth numbers are expected to continue.
The company projects total Q3 revenues to come in at $16 billion.
Of course, it’s not all about top-line growth…..but we are already seeing the crazy numbers translating to lots of free cash flow for Nvidia.
What does this mean for shareholders?
Growing EPS numbers!
For Q2, the company reported GAAP earnings per share of $2.48.
That’s an increase of 854% YoY and 202% from the previous quarter!
This brings us to our next point…
2.) Nvidia is Trading Cheaper Now Than in January
This may seem like a crazy statement given that NVDA is currently at around $450…
You have to remember though, the fundamental picture for the company is not the same as it was at the beginning of 2023.
Let’s look at the PE ratio, as it is commonly used for analyzing established companies.
The PE based on the stock price from a few days ago is at 109.87.
If we go back to January 31st, it was at 112.24!
Keep in mind that the PE does not take into account the growth rate…
Why is this important?
Based on the expected numbers for Q3 and beyond, it’s likely that the PE will be closer to 50 in a few quarters assuming the stock price stays at these levels!
3.) The Total Addressable Market is Projected to Grow Rapidly
Some try to argue that AI is a fad, but reality doesn’t support this.
If you don’t believe me, take a look at what Precedence Research has to say on the matter…
They project the AI industry to grow from $538 billion in 2023 all the way to around $2.5 trillion by 2032 at a CAGR of 19%…
Major companies like Microsoft and Amazon are spending billions of dollars to either get on top of this trend or risk getting left behind.
And guess where a lot of that money is going?
Nvidia!
In fact…
4.) They Have a Virtual Monopoly of the Market
According to a report from CB Insights, Nvidia may have as much as 95% of the GPU market for machine learning!
While competitors like AMD are trying to play catchup, the reality is…..it’s basically a one-man race at the moment.
This means big dog customers like Google are willing to pay top dollar for Nvidia’s chips…
Reports suggest that the H100s are selling at around $30,000 a pop!
While these costs will go down once Nvidia successfully ramps up production, at that point they will be offsetting the lower margins with higher sales numbers.
5.) Hardware Company Expanding into Software
While virtually all of the current revenue boom is driven by Nvidia’s AI chip offerings, that could change in the future…
You see, the current hardware is backed by the CUDA AI software stack.
While folks are typically focused on the hardware side of things, software is one of the biggest advantages Nvidia currently has over its competitors…
This is a great opportunity for the company to scale its revenue numbers through subscription service model offerings.
In fact…..the company’s CFO recently said that AI Enterprise software could eventually make up about one-third of their total AI revenue (according to The Register)!
The great thing about software?
It tends to be a very high-margin business!
While there are certainly many reasons to be bullish on Nvidia…
Every opportunity carries some risk!
Risk: Nvidia Could Lose Market Share as Competitors Catch-up
The reality is that Nvidia’s competitors were late to the game…
That’s a big reason why the company finds itself in the advantageous position it is in today.
This advantage may not last forever though…
Everyone is fully aware now that there is a lot of money to be made in AI.
That may be good for growing the overall market size in the coming years, but it is also good for expanding the competition.
I expect a serious effort from all directions (startups, cloud service providers, etc.) to try to dethrone the current king of the industry.
Despite the risks though, Nvidia’s definitely one to watch out for in the coming quarters…
Until Next Time,
-Damian