It would be an understatement to say that Nvidia (NVDA -3.87%) crushed Wall Street's expectations with its outstanding guidance when it released its fiscal 2024 first-quarter results for the three months ended April 30 on May 24. The next day, shares of the graphics card specialist surged nearly 25% as investors were wowed by its eye-popping guidance.
The latest surge has brought Nvidia's year-to-date gains to a whopping 166%, which leads to the question of whether it is too late for investors to buy this high-flying semiconductor stock. But before trying to answer that question, let's see why the market rewarded Nvidia so handsomely after its latest quarterly report.
Nvidia is about to step on the gas
Nvidia's Q1 2024 revenue came in at $7.2 billion, down 13% over the prior-year period. That number was ahead of the company's original guidance of $6.5 billion by a huge margin. Interestingly, Nvidia's adjusted earnings shot up 28% over the prior-year period to $0.82 per share last quarter.
While that may seem surprising at first, a closer look at the terrific pricing power that Nvidia is enjoying in the data center GPU (graphics processing unit) market explains why the company's bottom line surged handsomely. Nvidia's data center GPUs, which cost tens of thousands of dollars, are in great demand as companies are racing to deploy artificial intelligence (AI) infrastructure for training and inferencing purposes.
According to Nvidia CFO Colette Kress on the company's latest earnings conference call:
...CSPs [cloud service providers] around the world are racing to deploy our flagship Hopper and Ampere architecture GPUs to meet the surge in interest from both enterprise and consumer, AI applications for training, and inference. Multiple CSPs announced the availability of H100 on their platforms, including private previews at Microsoft Azure, Google Cloud, and Oracle Cloud Infrastructure, upcoming offerings at AWS and general availability at emerging GPU specialized cloud providers like CoreWeave and Lambda.
Multiple companies have reportedly made a beeline for Nvidia's AI chips, which is why the company has been placing additional orders at its foundry partner. Nvidia founder and CEO Jensen Huang indicated the same in the company's earnings press release:
Our entire data center family of products -- H100, Grace CPU, Grace Hopper Superchip, NVLink, Quantum 400 InfiniBand and BlueField-3 DPU -- is in production. We are significantly increasing our supply to meet surging demand for them.
This massive demand can be judged from the performance of Nvidia's data center business last quarter, as well as its guidance. The company's data center revenue increased 14% year over year to a record $4.28 billion during the quarter as demand for AI chips surged.
The guidance was even better, as Nvidia is anticipating $11 billion in revenue in the current quarter. That's at least 50% higher than the $7.2 billion figure that analysts were looking for. It is also worth noting that Nvidia's guidance points toward a whopping 64% year-over-year surge in revenue from the prior-year period's top line of $6.7 billion. The chipmaker has also guided for a non-GAAP gross margin of 70%, which would be a massive jump over the year-ago quarter's reading of 46%. This suggests Nvidia's earnings are set to surge big time in the current quarter.
Can the stock deliver more upside?
Nvidia's guidance has upstaged analysts' expectations by a huge margin, so it wouldn't be surprising to see the stock sustain its remarkable rally. At the same time, investors shouldn't forget that the company's primary data center catalyst -- generative AI -- is just getting started. Polaris Market Research estimates that the generative AI market could clock annual growth of 34% over the next decade, and hit $200 billion in annual revenue by 2032.
Nvidia management remarked on the earnings call that "generative AI is driving exponential growth in compute requirements and a fast transition to Nvidia accelerated computing." So the rapid growth of the generative AI space should drive greater demand for Nvidia's GPUs, as they are going to play a critical role in the proliferation of this technology.
Moreover, the demand for chips capable of tackling AI workloads is expected to grow from just under $17 billion a year in 2022 to more than $227 billion annually in 2032. This suggests there's still a lot of room for growth in Nvidia's data center business given its terrific share of the market for AI chips. Not surprisingly, analysts have rapidly raised their growth expectations from Nvidia.
NVDA Revenue Estimates for Current Fiscal Year data by YCharts
All this indicates that Nvidia should be able to deliver more upside even after its outstanding run on the market in 2023. But investors will have to pay a premium if they haven't bought Nvidia yet and want to take advantage of its AI-driven growth.
The tech stock is trading at an extremely rich 202 times trailing earnings. But the company's guidance and the long-term potential justify that multiple, especially considering the healthy revenue and earnings growth that it expects to deliver.
Nvidia's forward earnings ratio of 53 points toward a sharp jump in the company's bottom line, which it should be able to deliver given the huge margin gains that it is anticipating. So even though Nvidia stock is very expensive, it seems worth buying considering that it gives investors a clear path to benefit from the adoption of AI.
