Shares of Nvidia (NVDA 4.69%) have been on fire so far this year. Fueled by increasing demand for its graphics processing units (GPUs) used for artificial intelligence (AI) and cloud computing, Nvidia stock has soared roughly 90% so far in 2023, easily eclipsing the 8% gains of the S&P 500 during the same period. But at least one analyst thinks this could be just the beginning.
HSBC analyst Frank Lee issued a rare double upgrade on Nvidia stock to buy from reduce (which is similar to a sell rating), while more than doubling his 12-month price target to $355, up from $175. That target represents potential gains for investors of roughly 30% compared to Monday's closing price.
Is Nvidia stock really that compelling, particularly in light of its recent gains? Let's take a look to see why the analyst is so bullish on the stock and whether or not it's still worth buying shares now.
Nvidia's H100 Hopper AI chip. Image source: Nvidia.
The path to $355
In justifying his enthusiasm, Lee cited the growing opportunity in AI. Since OpenAI introduced ChatGPT in late November, the public has been mesmerized by advances in generative AI, which made the conversational chatbot the belle of the ball. Further fueling the fervor was an announcement that Microsoft, which had already invested $3 billion in OpenAI, was extending its partnership with a further investment of $10 billion, while also integrating ChatGPT into its Bing search engine.
The next phase of AI development could represent a massive opportunity. In fact, Cathie Wood's Ark Investment Management has done some calculations and estimates that AI software could represent a $14 trillion revenue opportunity by 2030.
So what does this have to do with Nvidia? Its GPUs are the industry standard for AI. It takes a great deal of computational horsepower to run the multitude of mathematical calculations necessary to train and operate these AI systems, and Nvidia semiconductors are best-in-class.
Lee admitted to being “shocked” by Nvidia’s unparalleled pricing power in the AI chip market and argued that that opportunity makes up for his previous concerns about Nvidia’s slowing demand for data center chips and rising inventories. Furthermore, Lee issued a rare mea culpa, admitting that he was initially "too cautious" on Nvidia, and now says that the company's AI opportunity is not fully priced into the shares.
He may be on to something. Nvidia's management estimates its total addressable market at roughly $1 trillion. While investors generally take those forecasts with a grain of salt, it helps to illustrate why Wall Street is increasingly optimistic about Nvidia's prospects.
It's not just Lee that's bullish. Over the past month, Nvidia has been on the receiving end of 14 price target increases and two upgrades as Wall Street becomes increasingly more bullish on the company's future prospects. In fact, every one of those analysts cited the growing opportunity afforded by AI as the primary reason for their increasing optimism.
Is Nvidia stock a buy?
The long-term opportunity and increasing adoption of AI will certainly act as a catalyst to fuel Nvidia's future growth. But is the stock a buy? Nvidia has never been cheap, and the stock is currently selling for 18 times next year's sales, when a reasonable price-to-sales ratio is between 1 and 2.
Furthermore, the company is currently dealing with macroeconomic headwinds that could get worse over the short term, particularly if the economy slips into a recession. The quick onset of the downturn and the rapid sales decline of Nvidia's gaming chips have persisted for several months. In its 2023 fourth quarter (which ended Jan. 29), revenue in the company's gaming segment was down 46% year over year, its third consecutive quarter of sales declines.
The news isn't all bad. CEO Jensen Huang suggested the worst might be over. "Gaming is recovering from the post-pandemic downturn, with gamers enthusiastically embracing the new Ada architecture GPUs with AI neural rendering," he said in the company's earnings press release in February. He went on to extoll the opportunity presented by AI: "AI is at an inflection point, setting up for broad adoption reaching into every industry," Huang said. "From start-ups to major enterprises, we are seeing accelerated interest in the versatility and capabilities of generative AI."
While the stock certainly isn't the screaming buy it was just a few months ago, Nvidia's future remains bright. Patient investors might want to wait for an opportunity to buy the dip. Those that buy now will need to do so with the intention of holding for three to five years, as Nvidia will need time to live up to its currently lofty valuation.
Nvidia has been a stellar performer over the past five years, gaining 371%. Given the tailwinds provided by AI, as well as the company's existing gaming and data center businesses, I don't think it's a matter of if Nvidia stock hits $355 per share, but when. I suspect investors won't have to wait very long.
