Shares of Nvidia (NASDAQ: NVDA) surged once again, jumping over 5% on 5 June 2024, with its market capitalisation exceeding US$3 trillion.
This increase in Nvidia’s value came as a result of a broad market rally in which the market anticipated rate cuts following the revelation of a slowing job market in the US.
For a brief moment, the chip giant was the second most valuable company in the world, surpassing Apple (NASDAQ: AAPL), and was behind only Microsoft (NASDAQ: MSFT).
With such a steep market capitalisation, this raises the question: Did you miss the boat?
Is Nvidia still an attractive stock to buy?
A sharp surge along with high valuation
Investors may suspect that Nvidia’s growth is unsustainable.
After all, its shares have surged by over 217% over the past year, and are up a stunning 3,000% over the past five years.
Putting this performance in context, fellow technology heavyweights Apple and Microsoft posted share price gains of 323% and 232%, respectively, over the past five years.
In contrast, a broader market index such as the NASDAQ Composite Index (^IXIC) went up by 126% during the same timeframe.
With such unprecedented growth in its share price, investors are drawing similarities to the “Dot-Com” bubble which happened over 20 years ago. ,
Labelling Nvidia as a bubble is unsurprising considering its recent share price performance.
But before making such a statement, it is important to understand what Nvidia does.
Nvidia is primarily a computing company, researching and developing central processing units (CPUs), graphic processing units (GPUs), data processing units (DPUs), and artificial intelligence (AI) software.
CPUs form the heart of a computer system, carrying arithmetic, logic and other operations to power our device.
GPUs are mostly utilised for gaming, rendering graphics and videos. However, it is getting popular in creative production and AI applications.
Lastly, DPUs are used to move data around data centres, and perform data processing.
Nvidia designs rather than manufactures microchips.
Most of the chips designed by Nvidia are manufactured by the Taiwanese firm, Taiwan Semiconductor Manufacturing Company (TSMC) (NYSE: TSM).
This partnership allows Nvidia to concentrate on design and innovation rather than deal with the mundane aspects of manufacturing.
Because its focus is squarely on design and leveraging its capability to produce superior chips that command premium prices, Nvidia enjoys high gross and operating margins.
For the first quarter of fiscal year 2025 (1Q FY2025), the company recorded a gross margin of 78.4% and an operating margin of 64.9%.
Revenue growth was explosive, soaring 262% year on year to hit US$26 billion.
Because of Nvidia’s high historical growth rate, the company’s valuation is therefore tied to its perceived growth potential.
Nvidia currently trades at a lofty trailing 12-month price to earnings (P/E) ratio of 71.6x.
While this is undoubtedly steep, Nvidia is forecasting US$28 million in revenue for its next quarter, with analysts projecting that the company’s forward P/E ratio will fall to a more palatable level of 40x.
Annualising the next quarter’s projected revenue means that Nvidia should see revenue surpass US$100 billion.
A P/E ratio of 40x, though still high, seems more reasonable if you factor in continued high growth for the GPU manufacturer.
As a comparison, another trillion-dollar stock, Amazon (NASDAQ: AMZN), currently trades at a trailing 12-month P/E ratio of 50.8x.
Unlike unprofitable dot.com stocks, Nvidia possesses the fundamentals to justify its seemingly high valuation.
Monopoly like structure
Looking at its 1Q FY2025 earnings, data centres made up the bulk of Nvidia’s revenue at 86.9%.
Nvidia’s high-performance GPUs are extensively utilised in its data centres to support a variety of high-performance computing workloads, ranging from AI, machine learning, and cloud services, among others.
Nvidia’s data centre GPUs power many of the platforms and services we use daily such as ChatGPT and Google Cloud.
Furthermore, Nvidia’s GPUs extend to other areas. For example, Sony Pictures has worked with Nvidia to enhance its movie production capabilities.
Even Singtel (SGX: Z74) has partnered with Nvidia recently to enhance the performance of Paragon, its 5G enterprise platform.
Nvidia dominates the data centre market with an estimated 98% market share for its GPUs.
Nvidia’s rich valuation can be justified by its booming data centre GPU business, with the industry projected to grow at a compound annual growth rate (CAGR) of 36.4% through 2028, according to MarketsandMarkets.
Its dominance in the industry can be traced back to its development of Compute Unified Device Architecture (CUDA) 15 years ago.
CUDA has transformed Nvidia’s GPU from graphic processors into a powerful computational tool capable of running complex programmes such as data processing, AI and high performance computing.
Nvidia’s CUDA has such a high market share that major semiconductor companies including Intel (NASDAQ: INTC), Qualcomm (NASDAQ: QCOM) and Arm Holdings (NASDAQ: ARM) have joined forces in an alliance called the UXL Foundation to try to create an alternative.
Nvidia’s growth ambitions
In 1Q FY2025, Nvidia introduced Blackwell GPU, further cementing its position in the AI-chip race.
The Blackwell architecture will help unlock breakthroughs in multiple emerging industry opportunities, like generative AI and quantum computing.
Several global giants are already expected to adopt Blackwell, including Meta Platforms (NASDAQ: META) and Amazon.
Furthermore, Nvidia is expanding its technology into other industries.
Its recent innovation, Clara, is a biopharma tool designed to accelerate drug discovery.
Automobiles and manufacturing are some of the other industries Nvidia is involved in.
These industries will serve as new revenue streams for the company.
Nvidia’s CEO Jensen Huang just announced Rubin, set to be available in 2026.
Rubin is set to succeed Blackwell by featuring new GPUs and a new type of CPU called Vera.
Apart from Rubin, Jensen Huang also outlined several of the company’s new initiatives.
Apart from increased generative AI capabilities, Nvidia is spearheading a US$50 trillion industry revolution through autonomous operations under Nvidia Robotics.
Risks to watch for in Nvidia
While Nvidia is undoubtedly one of the world’s biggest disruptors, investors should still be wary.
Firstly, the semiconductor industry is known to be cyclical with frequent booms and busts.
However, despite the 2023 semiconductor slowdown, Nvidia has proven its resilience by emerging unscathed.
Furthermore, with the increased integration of technology into our daily lives, these cycles may be less volatile in the near future.
Secondly, shares of Nvidia went through a stock split on 7 June 2024. Stocks tend to be more volatile following a stock split given the sudden increase in accessibility.
Investors might consider waiting for the market to stabilise before considering investing.
Lastly, other companies like Intel and Advanced Micro Devices (NASDAQ: AMD) are actively vying for a share of Nvidia’s market.
Nvidia’s 98% market share in data centre GPUs is expected to drop to 94% to 96% as these companies play catch up.
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Disclosure: Aw Kai Rui does not own any of the stocks mentioned in this article.
