After Earnings and a Massive Rally, Is Nvidia Stock a Buy, a Sell, or Fairly Valued?

Nvidia NVDA released its fiscal fourth-quarter earnings report on Feb. 21. With the company’s stock price up 60% so far this year, here’s Morningstar’s take on Nvidia’s earnings and valuation.

Key Morningstar Metrics for Nvidia

• Fair Value Estimate: $730.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Very High

What We Thought of Nvidia’s Q4 Earnings

• Nvidia delivered another excellent quarter, beating its guidance and raising its outlook for the April quarter. Demand for artificial intelligence accelerators continues to exceed supply, and 2024 is shaping up to be a banner year for the company, above and beyond the healthy growth we were previously projecting. More importantly, we think this demand is sustainable, as leading cloud companies will continue to invest in AI and rely on Nvidia’s data center GPUs.
• The results gave bullish investors everything they could have hoped for. Nvidia is still dominant in AI semis. Bearish investors may have been concerned about sales into China, but though revenue from the country dipped significantly due to US restrictions, this didn’t weigh on Nvidia’s quarterly results whatsoever, as the firm found new customers elsewhere.
• Our new $730 fair value estimate could turn out to be conservative if Nvidia can maintain its dominant market share position while AI buildouts continue to grow substantially. On the other hand, competition is fierce, and cloud companies have plenty of incentive to find alternatives. We thus reiterate our Uncertainty Rating of Very High.

Fair Value Estimate for Nvidia

With its 3-star rating, we believe Nvidia’s stock is fairly valued compared with our long-term fair value estimate of $730 per share, which implies an equity value of roughly $1.8 trillion, a fiscal 2025 (ending January 2025, or effectively calendar 2024) price/adjusted earnings multiple of 28 times, and a fiscal 2026 forward price/adjusted earnings multiple of 22 times.

For better or worse, both our fair value estimate and Nvidia’s stock price will be driven by the company’s prospects in the data center, or DC, and AI GPU businesses. DC has already achieved exponential growth, going from $3 billion in fiscal 2020 to $15 billion in fiscal 2023 and then more than tripling to $47.5 billion in fiscal 2024. DC revenue appears to be constrained by supply, and we think Nvidia will continue to steadily boost revenue in each of the four quarters in fiscal 2025 as more supply comes online. Based on Nvidia’s strong forecast start for fiscal 2025, we model DC revenue rising 113% to $101 billion over the year.

We model a 10% compound annual growth rate for the three years thereafter, as we think it is reasonable that the firm may face an inventory correction or a pause in AI demand at some point in the medium term. We model an average annual DC growth of 10% thereafter, and we consider this a reasonable long-term growth rate as AI matures.

We anticipate that revenue will grow faster than operating expenses, leading to operating leverage. Nvidia earned a 54% GAAP operating margin in fiscal 2024, and we model expansion to 63% in fiscal 2025 and 65% in fiscal 2026. We model modest compression thereafter to just under 60% in fiscal 2034. We expect that increased competition may strive to chip away at Nvidia’s significant pricing power, but we ultimately expect the company to be able to fend off these competitive pressures, thanks to the high switching costs associated with the Cuda platform.

Read more about Nvidia’s fair value estimate.

Nvidia Historical Price/Fair Value Ratio

Ratios over 1.00 indicate when the stock is overvalued, while ratios below 1.00 mean the stock is undervalued.

Economic Moat Rating

We assign Nvidia a wide moat, thanks to intangible assets around its graphics processing units and, increasingly, switching costs around its proprietary software, such as its Cuda platform for AI tools, which lets developers use the firm’s GPUs to build AI models.

Nvidia has emerged as the clear market share leader in discrete GPUs (over 80% share, per Mercury Research). We attribute this leadership to intangible assets associated with GPU design, as well as the associated software, frameworks, and tools developers need to work with these GPUs. In our view, recent introductions like ray-tracing technology and the use of AI tensor cores in gaming applications are signs Nvidia has not lost its GPU leadership in any way. A quick scan of GPU pricing in both gaming and DC shows the firm’s average selling prices can often be twice as high as those of its closest competitor, Advanced Micro Devices AMD.

Meanwhile, we don’t foresee any emerging companies becoming a third relevant player in the GPU market. Even chip industry behemoth Intel INTC has struggled for many years to build a high-end GPU that would be adopted by gaming enthusiasts, and its next effort at a discrete GPU is slated to launch in 2025. We do see integrated GPU functionality within many of Intel’s PC processors, as well as in portions of Apple AAPL and Qualcomm’s QCOM system-on-chip solutions in smartphones. However, we perceive these integrated solutions as “good enough” for nongamers but not on par with high-end GPU needs.

Read more about Nvidia’s economic moat.

Risk and Uncertainty

We assign Nvidia an Uncertainty Rating of Very High. The firm is an industry leader in GPUs used in training AI models, and it’s carved out a good portion of demand for chips used in AI inference workloads (which involves running a model to make a prediction or output). The sky is the limit for the company’s profitability if it can maintain this lead over the next decade. However, any semblance of the successful development of alternatives could meaningfully limit its upside.

We see a host of tech leaders vying for Nvidia’s leading AI position. We think it is inevitable that leading hyperscale vendors, such as Amazon’s AMZN AWS, Microsoft MSFT, Alphabet GOOGL/GOOG, and Meta Platforms META, will seek to reduce their reliance on Nvidia and diversify their semiconductor and software supplier base, including the development of in-house solutions. Google’s TPUs and Amazon’s Trainium and Inferentia chips were designed with AI workloads in mind, while Microsoft and Meta have announced semiconductor design plans. Among existing semis vendors, AMD is quickly expanding its GPU lineup to serve these cloud leaders. Intel also has AI accelerator products today, and it will likely remain focused on this opportunity.

Outside the data center, Nvidia’s gaming business often faces boom-or-bust cycles along with PC demand—and more recently the sharp rise and fall of cryptocurrency mining. The company also has invested heavily in autonomous driving, but here again it squares off against many other chipmakers (and automakers) for a piece of the pie, with little guarantee of success.

Read more about Nvidia’s risk and uncertainty.

NVDA Bulls Say

• Nvidia’s GPUs offer industry-leading parallel processing, which was historically needed in PC gaming applications, but it has expanded into crypto mining, AI, and perhaps future applications as well.
• Nvidia’s data center GPUs and Cuda software platform have established the company as the dominant vendor for AI model training, which is a use case that should rise exponentially in the years ahead.
• The firm has a first-mover advantage in the autonomous driving market that could lead to widespread adoption of its Drive PX self-driving platform.

NVDA Bears Say

• Nvidia is a leading AI chip vendor today, but other powerful chipmakers and tech titans are focused on in-house chip development.
• Although Cuda is currently a leader in AI training software and tools, leading cloud vendors would likely prefer to see greater competition in this space, and they may shift to any alternative open-source tools that arise.
• Nvidia’s gaming GPU business has often seen boom-or-bust cycles based on PC demand and, more recently, cryptocurrency mining.

This article was compiled by Freeman Brou.