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Following Nvidia ‘s (NVDA) brilliant quarterly results and astounding guidance, we’re raising our price target on the artificial-intelligence chipmaker Thursday to $600 a share, up from $450. Nvidia’s second-quarter fiscal year 2024 earnings release is the latest sign that the generative AI boom will continue to propel the chipmaker’s stock higher, further underscoring the Club’s rare “own it, don’t trade it” mantra on this semiconductor stock. Here are three major reasons why Nvidia stock — which has amore than tripled so far in 2023 — has not finished its climb, justifying our $600-per-share price target. Valuation As the market on Thursday cheers Nvidia’s better-than-expected results and current-quarter outlook, its stock has gotten cheaper than before the print. That’s because Wall Street’s earnings estimates have been revised much higher than Nvidia stock’s more-than-3% post-earnings gain. A forward price-to-earnings (P/E) ratio is calculated by dividing a company’s stock price by its annual earnings-per-share (EPS). If the denominator — in this case, EPS — increases by a larger magnitude than the numerator, the quotient will get smaller. And that’s precisely what transpired with Nvidia on Thursday. Using Thursday’s midday price of roughly $486 per share, Nvidia stock trades at a 46.6 P/E, based on fiscal year 2024 estimates. The stock’s valuation drops further, to roughly 30 times forward earnings, based on 2025 estimates. At Wednesday’s close of $471.16 per share, Nvidia traded at a P/E of 56.3, based on 2024 estimates, and a P/E of 36.8, based on 2025 estimates. Nvidia’s five-year average forward P/E is about 40, according to FactSet. This dynamic has persisted for years, including just a few months ago in the wake of Nvidia’s standout first-quarter earnings and guidance. History shows that, in many instances, Nvidia looks expensive on estimates, and then proves to be cheaper on the actual results. That makes Nvidia’s stock rally largely an earnings-driven story, not an ascent rooted in multiple expansion. Those are the rallies that can hold because they’re based on fundamentals, not based on a belief that there will be another buyer willing to pay a higher premium for a stock. Data-center transformation The way that Nvidia CEO Jensen Huang tells it, the widespread adoption of generative AI has sparked a need to reconfigure the world’s data centers, shifting more work to accelerated computing enabled by graphics processing units (GPUs), away from traditional processors known as central processing units (CPUs). The greater role for GPUs in servers plays right into Nvidia’s hands, because it has the best chip in that category, along with the accompanying software needed to optimize the hardware. And even though CPUs — a market long led by Advanced Micro Devices (AMD) and Intel (INTC) — will remain in AI-optimized data centers, Nvidia is starting to encroach on that turf , too. Taken together, Nvidia’s technology is at the center of a transition cycle in a massive market, proving a tailwind for its revenue and earnings in the years ahead. “There’s about a trillion dollars’ worth of data centers, [and] call it a quarter of a trillion dollars of capital spend each year,” Huang said Wednesday following the earnings release. “You’re seeing that data centers around the world are taking that capital spend and focusing it on the two most important trends of computing today, accelerated computing and generative AI,” he added. The spending shift is being led by the big cloud-service providers (CSPs), such as Club holdings Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN) and Oracle (ORCL). In its second quarter, Nvidia CFO Colette Kress said Wednesday, these large CSPs contributed “a little bit more than 50%” of the company’s record $10.32 billion in data-center revenue. Consumer-internet giants like Meta Platforms (META), another Club stock, were the second-biggest contributors to data-center sales. Clear leader Overall spending on AI is expected to reach $154 million this year, and roughly double from that level by 2026, according to estimates from market-research firm IDC . Many semiconductor firms will be able to benefit from this expansion — which is part of why we initiated a position in Broadcom (AVGO) earlier Thursday — but the clear leader is Nvidia. For customers who prioritize performance above all else, Nvidia is where they turn. Not only does it have the fastest GPUs around, but Nvidia’s InfiniBand infrastructure helps link together all those servers. In the second quarter, Nvidia said its networking revenue, which includes InfiniBand, nearly doubled compared with the year-ago period. And with Nvidia sending in the cavalry on the CPU side, one of the only holes in its AI portfolio will soon be plugged. Known as the GH200 Grace Hopper Superchip, this CPU-plus-GPU combo is designed to run generative AI models on a day-to-day basis. Nvidia’s multifaceted hardware portfolio across processing and networking, combined with its software offerings , place the company on the high ground in the lucrative AI battle. Of course, there’s competition from the likes of AMD and cloud-service providers themselves, such as Amazon . But, when we survey the landscape, no company is better positioned to gain a bigger share of AI spend than Nvidia. And that should keep sales and profits growing well into the future. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
A sign is posted in front of the Nvidia headquarters in Santa Clara, California, May 10, 2018.
Justin Sullivan | Getty Images
Following Nvidia‘s (NVDA) brilliant quarterly results and astounding guidance, we’re raising our price target on the artificial-intelligence chipmaker Thursday to $600 a share, up from $450.
Nvidia’s second-quarter fiscal year 2024 earnings release is the latest sign that the generative AI boom will continue to propel the chipmaker’s stock higher, further underscoring the Club’s rare “own it, don’t trade it” mantra on this semiconductor stock.
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