Thursday, 19 September 2024
by BD Banks
Nvidia (NASDAQ: NVDA) stock’s breathtaking rally that began toward the end of 2022 has taken a hiatus of late. More specifically, shares of Nvidia have witnessed some volatility since the beginning of July, and the company’s solid fiscal 2025 second-quarter results haven’t been enough to inject some life into its fortunes on the stock market.
The reasons behind Nvidia’s recent volatility can be attributed to concerns about a slowdown in its growth, as well as the viability of artificial intelligence (AI) technology following the massive investments made in this space by companies and governments across the globe. However, Nvidia’s quarterly results and bullish guidance make it clear that the company’s impressive growth is here to stay.
Moreover, a closer look at the consensus stock price target indicates analysts expect Nvidia stock to regain its mojo. Nvidia has a median 12-month price target of $150 as per 63 analysts covering the stock, which would be a 28% jump from current levels. However, the Street-high price target of $200 suggests that Nvidia stock could jump another 71% over the next year.
Here’s why this semiconductor company’s shares could hit that mark in 2025.
Strategic advisory firm Constellation Research gave Nvidia stock a $200 price target in June this year. The firm points out that the semiconductor bellwether enjoys several advantages that could send its shares to $200 in the coming year and even help it sustain its rally for a longer period.
Constellation says Nvidia has managed to create high barriers to entry in the AI chip market and has a robust product roadmap, while high switching costs mean that customers who are locked into its ecosystem are unlikely to move to a competing offering anytime soon. Because of these reasons, the research firm estimates Nvidia enjoys a technology lead of 24 months over its rivals in the AI graphics card market.
A closer look at Nvidia’s recent quarterly results will show that it is indeed the go-to supplier of graphics cards for companies and governments looking to train and deploy AI models. The company’s revenue in the second quarter of fiscal 2025 shot up an impressive 122% year over year to $30 billion. The data center business produced $26.3 billion in revenue during the quarter, a jump of 154% from the same period last year.
Nvidia CEO Jensen Huang pointed out that the demand for the company’s graphics cards based on the Hopper architecture remains solid, with shipments expected to increase in the second half of the fiscal year. That’s a testament to Nvidia’s outstanding moat in the AI graphics processing unit (GPU) market as the company’s next-generation Blackwell chips are already sampling with customers and are set to go into full production from the fourth quarter of the fiscal year.
In other words, customers are still willing to purchase Nvidia’s older AI chips even though the new ones are on the way, suggesting that its products are indeed superior to rivals such as AMD and Intel. For instance, Nvidia’s Hopper H200 processor reportedly outperforms its AMD rival, MI300X, by more than 40% in AI inference applications. Considering that the H200 reportedly costs less than the MI300X, it is easy to see why Nvidia has been witnessing an improvement in the demand for this chip even though newer chips are on the way.
Not surprisingly, Nvidia is likely to maintain its dominant position in the AI chip market. That’s also helping the company maintain healthy pricing power and enjoy fat margins. For example, Nvidia’s non-GAAP gross margin increased by 5 percentage points on a year-over-year basis last quarter to 75.1%.
As a result, the company’s adjusted earnings jumped 152% year over year to $0.68 per share, prompting analysts to increase their earnings projections for the current and the next fiscal year.
NVDA EPS Estimates for Current Fiscal Year data by YCharts
The chart above indicates that Nvidia’s earnings could hit $4 per share in the next fiscal year (which will coincide with the majority of calendar 2025). However, there is a good chance that its earnings could exceed that mark as analysts could continue to raise their growth expectations because of a potentially big jump in its data center revenue next year.
Let’s assume that Nvidia’s earnings really do increase to $4 per share. That would be a 41% increase over its projected fiscal 2025 earnings. If the stock maintains its price-to-earnings ratio of 55 at that time, the stock price could jump to $220. It is worth noting that Nvidia is currently trading at a relative discount to its five-year average price-to-earnings ratio of 72.
More importantly, this company can justify its valuation through impressive growth because of its robust position in the AI chip market. So, there is a good chance that this AI stock could resume its journey north and go past $200 next year.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.