The first half of 2023 has been terrific for investors in Nvidia (NVDA -4.69%) as shares of the chipmaker have shot up 195%, driven largely by the company's artificial-intelligence powered growth that has helped it overcome the weakness in the personal computer market.
Nvidia is on track to deliver outstanding revenue and earnings growth in the ongoing fiscal year 2024 (which began on Jan. 30, 2023). Analysts are anticipating a 59% jump in revenue to roughly $43 billion, while adjusted earnings per share (EPS) are forecast to jump to $7.78 from $3.34 in the year-ago period.
But according to a consensus of 43 analysts covering the stock, it has a median price target of $464. That points toward gains of just 10% from current levels.
With Nvidia trading at 220 times trailing earnings, investors may wonder if they should buy the stock right now given the limited upside that Wall Street expects and the potential challenges the company faces in the form of restrictions on sales of its chips to China.
Let's check if putting your money in Nvidia is a good idea right now.
A ban on sales to China could affect Nvidia
The stock fell after The Wall Street Journal reported last week that the Commerce Department is likely to stop shipments of the company's artificial intelligence (AI) chips to China. The semiconductor giant will need to procure a license in order to sell its AI chips in China.
Nvidia had worked around the restrictions that the Commerce Department imposed in October last year, which prevented the shipments of advanced chips to China, by introducing a new data center GPU (graphics processing unit) that met the U.S. government's regulations. The company has also tweaked its latest flagship data center GPU, the H800, so that it can sell it to China.
But its China-specific chips are reportedly now in the crosshairs of the Commerce Department's latest restrictions. Chief financial officer Colette Kress says that the added restrictions aren't going to materially affect the company's results in the near term thanks to the robust demand for its AI-focused graphics cards across the globe.
But she added that a ban on sales of AI chips to Chinese customers means that Nvidia is going to miss out on a long-term growth opportunity in a key market.
Kress fears that this could eventually hurt the company's financial performance, and it is not surprising to see why. Market research firm IDC estimates that the AI market in China could generate more than $26 billion in revenue by 2026, which would be more than double last year's revenue of $12 billion.
The firm forecasts that hardware will account for 56% of China's AI market in 2026, generating nearly $15 billion in revenue. Considering the demand for Nvidia's data center GPUs in China, the company may have been able to corner a nice chunk of this lucrative revenue opportunity. The demand for its graphics cards in China is so strong that customers are reportedly offering huge premiums of around 70% over the manufacturer's suggested retail price.
China accounted for 22% of Nvidia's top line in the previous fiscal year, suggesting that the effect could be felt sooner rather than later if the curbs begin this month.
What should investors do?
With Nvidia trading at a sky-high valuation, the company needs to deliver solid growth consistently to remain in investors' good graces. The semiconductor producer has issued a terrific revenue forecast of $11 billion for the current quarter, which would be a 64% increase over the prior year. Management attributes its outstanding guidance to the hot demand for its data center GPUs, with the waiting period for them reportedly extending until the end of the year.
That's why it might be able to withstand any further restrictions on sales to Chinese customers since it can meet demand elsewhere. More importantly, there is a chance that the global demand for AI chips could be enough to help Nvidia offset any weakness in China.
IDC estimates that the global AI market could generate $300 billion in annual revenue by 2026. This suggests that the Chinese market could account for less than 10% of that revenue after three years.
As a result, there may be enough room for Nvidia to overcome any potential headwinds in China. For example, the market for AI chips in North America could clock 32% annual growth through 2027 and generate more than $30 billion in revenue. The European market is expected to show similar growth as well.
Analysts estimate that Nvidia controls between 80% to 95% of the market for AI computing chips, which is expected to be worth $227 billion after a decade. As such, it won't be surprising to see the company keep up the impressive growth that Wall Street is expecting from it.
NVDA revenue estimates for current fiscal year data by YCharts.
And solid pricing power and the burgeoning demand for AI chips are expected to drive healthy growth in its earnings as well.
NVDA EPS estimates for current fiscal year data by YCharts.
The anticipated acceleration in Nvidia's earnings explains why this AI stock is trading at 55 times forward earnings, which is way below its trailing earnings multiple. The forward earnings multiple is also on the expensive side, but the company can justify it, giving growth investors a reason to buy the stock.
What's more, if Nvidia stock dips on the back of China-related restrictions, investors may want to capitalize on this opportunity and buy it, considering the bigger picture discussed above.
