Nvidia (NASDAQ:NVDA) has enjoyed a massive run. The company eclipsed a $2 trillion valuation as part of a 247% gain over the past year and a 1,921% gain over the past five years. When a stock experiences that much growth, it’s easy to wonder if it is in the middle of a bubble. I wrote an article recently discussing the impending crash of Super Micro Computer (NASDAQ:SMCI) stock, but the same catalysts are not present for Nvidia. I’m bullish on Nvidia stock and believe it can continue to march higher.
This Stock Didn’t Come Out of Nowhere
Nvidia had been a leading chipmaker for several years before the AI boom made this stock huge. The company’s valuation came into question during the company’s Fiscal 2023 (ended January 2023) after revenue significantly slowed down and net income growth turned negative year-over-year. Those numbers were a big shift from the robust financials seen in Fiscal 2022.
Data Centers weren’t always the leading growth segment. Gaming was previously the company’s biggest segment, and it continues to perform well. Professional Visualization and Automated sectors also generate hundreds of millions of dollars each.
Even during the company’s sluggish Fiscal 2023, Data Center revenue grew by 41% year-over-year. The company then had a historic Fiscal Year 2024, which featured 217% year-over-year Data Center growth compared to Fiscal Year 2023. Further, net income increased by 581% year-over-year.
Financial Growth Justifies the Valuation
Although a 238% gain over the past year can raise some eyebrows from skeptical investors predicting a bubble burst, Nvidia’s net income outpaced its total stock gains for the year. High net income growth has contributed to a 33x forward P/E ratio and a 1.26x five-year forward PEG ratio. These valuation metrics may make it easier to justify the stock’s current price.
A surging net profit margin accompanied the rising stock price, which strengthens the bullish thesis. NVDA’s net profit margin was 28.41% in the first quarter of Fiscal 2024, and it expanded to 55.58% in Q4.
More profits will help to sustain the stock price at current levels while offering more room for growth. Nvidia finds itself at the center of artificial intelligence, and corporations are rushing to tap into this technology.
AI Growth Will Slow Down Eventually
Nvidia achieved 265% year-over-year revenue growth in the fourth quarter of Fiscal 2024. Furthermore, the company’s large Data Center segment increased sales by 409% year-over-year.
Nvidia’s guidance hints at continued growth into Fiscal 2025. The company expects $24.0 billion in Q1 FY25 revenue, plus or minus 2%. Using the midpoint, Nvidia expects 8.6% quarter-over-quarter growth.
That growth rate is slower than the 22% quarter-over-quarter growth Nvidia experienced to wrap up Fiscal 2024. However, $24.0 billion is roughly 233.8% higher than Q1 FY24 revenue. That’s a significant year-over-year growth rate. Based on recent trends, net income growth should come in above 233.8% year-over-year in the first quarter of fiscal 2025.
Still, Nvidia stock can adjust to slower growth rates once the company realizes its 33x forward P/E ratio. A lower P/E ratio gives the stock a greater margin of safety from any contractions within the industry.
It’s also important to consider what slower growth will look like. The projected 8.6% quarter-over-quarter growth is slower than in previous quarters. Compounding that growth rate over four quarters results in a 39.1% annual growth rate (1.086^4).
Is NVDA Stock a Buy, According to Analysts?
Most analysts have praised Nvidia stock and believe it can go higher. The stock is rated as a Strong Buy, which includes 38 Buy ratings and two Hold ratings. No analyst rated the stock as a Sell.
The average NVDA stock price target of $881.52 implies 13.5% upside potential. However, the highest price target of $1,200 suggests that Nvidia can gain more than 50% from current levels. If Nvidia reaches this price target, it will become a $3 trillion company and may end up becoming the most valuable company in the stock market.
The Bottom Line on Nvidia Stock
Nvidia has drawn attention to itself and any stock that has a slight correlation with artificial intelligence. Some AI stocks surged a few weeks ago with no news other than Nvidia having stakes in them. Nvidia is, without question, the leader of the artificial intelligence industry. The firm has capitalized on a rapidly growing opportunity and has surpassed the market caps of many tech giants.
Despite a significant run-up, Nvidia still remains a good Buy, in my opinion, due to high revenue and net income growth. The company’s valuation is attractive at a 33x forward P/E ratio, which will continue to improve if Nvidia continues to post solid financials.
The days of 200%+ stock gains in one year are likely over. However, Nvidia is still in a good position to outperform the stock market.
