Nvidia Shares Skyrocket; Growth Expectations too Lofty

Wide-moat Nvidia NVDA reported stellar third-quarter results with revenue ahead of management’s guidance. Gaming and data center segments were the primary growth drivers, and we expect positive momentum in each end-market to persist in the near term. Shares are up over 50% over the past three months, which we attribute to optimism around Nvidia’s exposure to the metaverse (a shared virtual-reality-based environment aimed at commerce, collaboration, entertainment, and so on.)

We are raising our fair value estimate to $200 per share on a probability-adjusted basis (up from $138), which includes a 50% probability that Nvidia closes its pending acquisition of ARM. Our fair value with ARM is $213 per share, whereas our standalone fair value for Nvidia is $187 per share.

To justify Nvidia’s current $300 stock price, we think revenue would need to grow at a nearly 30% CAGR over the next five years to about $57 billion in 2025, with data center sales growing at a 40% CAGR. We do not dispute Nvidia’s AI acceleration leadership, but think current share prices do not account for competition from AMD, Intel, or hyperscale customers themselves.

We note the firm’s Omniverse platform is Nvidia’s own metaverse offering tailored to 3D design collaboration and simulation as well as avatars for customer support applications. Nvidia’s GPUs and other data center hardware and software products are likely to be heavily implemented in future metaverse platforms from the likes of Meta (formerly Facebook), Microsoft, and others. Consequently, we think the market has anointed Nvidia and its GPUs as the primary beneficiary of recent capital expenditure plans from Meta ($29 billion to $34 billion in 2022 compared with $19 billion in 2021). While AMD recently announced its latest EPYC CPUs will be adopted at Meta, we still expect Intel’s CPUs to also be prominent in their data centers. Nvidia will also need to deal with upcoming challengers in AMD’s Aldebaran and Intel’s Ponte Vecchio data center GPUs.

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