What happened
Shares of Nvidia (NVDA 6.18%) rallied in June, with shares climbed 12%, according to data provided by S&P Global Market Intelligence. That's nearly double the 6.5% gains of the S&P 500, compounding its impressive gains so far in 2023, with the stock up an eye-popping 189% as of market close on June 30.
Helping fuel the semiconductor giant's rally was a wave of price target increases from Wall Street, as analysts scrambled to update their models in the wake of Nvidia's exceptionally strong guidance for the current quarter.
Image source: Nvidia.
So what
It's worth stepping back to explain why analysts have been so bullish regarding Nvidia's prospects. The company signaled an inflection point in the evolution of artificial intelligence (AI) when Nvidia reported the financial results of its fiscal 2024 first quarter (ended April 30). The company generated revenue of $7.2 billion, a decline of 13% year over year, resulting in net income of $2 trillion, down 26%.
While that might not seem like much to write home about, it was Nvidia's blockbuster forecast that took Wall Street by surprise. For the second quarter, management is guiding for revenue of $11 billion, up 64% year over year and 53% sequentially. CFO Colette Kress cited "growing demand for generative AI" as driving its forecast higher.
Analysts at Morgan Stanley raised their price target on Nvidia to $500, up from $400, while simultaneously naming the stock a "top pick" in the semiconductor space. This suggests potential upside for investors of 18% -- even after the stock's nearly 200% gains so far this year. The investment bank cited growing demand for AI, suggesting that only Nvidia was in a position to "beat and raise this year," according to The Fly.
Jefferies analyst Mark Lipacis also raised his price target to $500, citing Nvidia's stack of AI hardware and software solutions, calling the company "the compute leader by far today in the early innings of AI."
Analyst Dan Ives was among the most bullish, saying AI represents the "fourth industrial revolution," with Nvidia as one of the primary beneficiaries, citing a "long runway of growth ahead."
Now what
I'd be remiss if I didn't mention Nvidia's valuation, as the stock currently sells for 20 times forward sales and 54 times forward earnings. While that might be off-putting to some investors, it's important to note that "AI is at an inflection point," according to CEO Jensen Huang, "setting up for broad adoption reaching into every industry."
If the world is at the beginning of a sea change -- and I, for one, believe it is -- this could be just the beginning for Nvidia. Its semiconductors are the gold standard for processing AI systems, and rapid revenue and earnings growth could quickly eclipse the disconnect between its valuation and the corresponding financial metrics.
