Chipmaker Nvidia's (NVDA +1.90%) shares soared 25% in extended trading May 24 on the back of blowout numbers for the company's fiscal 2024 first quarter, ended April 30. Nvidia's revenue and earnings have handily beaten consensus estimates, driven by solid demand for artificial intelligence (AI) chips.
The data center segment is back in solid growth mode and well-positioned to benefit from the rapid uptake of generative AI capabilities by enterprises across industries and functions. Gaming and automotive segments also reported solid numbers in the first quarter.
Nvidia's shares are up about 166% so far this year thanks to a high-quality, diversified business with a huge addressable market and competent management team. But the stock's surge also has some investors wondering if the market is showing excessive exuberance.
So, what exactly should investors do? Let's take a closer look to see if Nvidia stock is a buy, hold, or sell in the current environment.
NASDAQ: NVDA
Key Data Points
Data center opportunity
Nvidia's data center segment reported record-high revenue of $4.28 billion in the first quarter, up 14% on a year-over-year basis and up 18% sequentially.
Currently, the $1 trillion data center infrastructure across the world is based on dumb NICs and CPUs. However, as data centers start to process large language models for generative AI applications, there will be an increased need for energy-efficient, robust, and faster computing capabilities. Besides, the data center market is currently in a secular growth phase and is expected to expand in the coming years.
Nvidia stands to emerge as a key beneficiary of these trends, considering that its flagship data center GPU H100 based on new Hopper architecture is well-suited for intensive workloads and high-performance computing. The company has also launched its Grace Hopper CPU to handle AI and high-performance computing applications.
Besides GPUs, Nvidia also offers AI-focused software services such as DGX Cloud (AI supercomputing service that includes infrastructure and software to train generative AI applications), CUDA toolkit (platform to program GPUs), and Omniverse (a scalable development platform for building and operating metaverse applications).
Solid guidance
For the fiscal second quarter, Nvidia expects revenue to be $11 billion plus or minus 2%, implying year-over-year growth of 62% to 66% and far ahead of the consensus estimate of $7.15 billion. The company is also guiding for sequential margin expansion with GAAP and non-GAAP gross margins of about 68.6% and 70%, respectively, compared to 64.6% and 66.8% in the first quarter.
Considering the midpoint of Nvidia's guidance numbers for all inputs (revenue, gross margins, operating expense, other income and expense, and tax rate) and a diluted share count of 2.49 million, the company is projecting non-GAAP earnings per share (EPS) of $2.03 for the second quarter -- far ahead of the consensus estimate of $1.05.
Risks
Investing in Nvidia is definitely not without risks. The stock is currently trading at a price-to-earnings (P/E) ratio of 218, significantly more expensive than the Nasdaq-100 index's multiple of 20. With a trailing-12-month net income close to just $4.8 billion and a current market capitalization of $939 billion, plenty of upside potential for the stock is already priced in.
Nvidia's gaming business recovery is also far from perfect. While the segment's revenue rose 22% sequentially, it was still down 38% year over year in the first quarter. Advanced Micro Devices (AMD +0.73%) is also a major competitor for Nvidia's gaming business, considering that the former's RX6000-Series GPUs are much cheaper than the latter's RTX 30-Series chips -- for almost similar processing power.
There is no doubt that Nvidia is poised to benefit dramatically from the "AI rush." The launch of ChatGPT has brought generative AI to the forefront of consumers' and investors' minds, thereby pushing up demand for Nvidia's AI chips and AI software. So although Nvidia's valuations can be called nothing short of enormous, market optimism revolving around the company can push up valuations even higher.
But Nvidia is not a stock for the weak-minded. Patient investors with a high-risk appetite can consider buying this stock by opting for a dollar-cost averaging strategy. By building a position in Nvidia over the long run, investors can mitigate the risk by buying at a range of different prices.
