The FAANG stocks have been among the best performers across the entire market since the acronym was coined in 2017 by CNBC commentator Jim Cramer. The FAANG acronym references:
- Facebook, which is now Meta Platforms;
- Apple;
- Amazon;
- Netflix; and
- Google, which now trades under its parent company Alphabet.
However, since 2017, stock market leadership has evolved. The latest group of stocks investors are focused on is the "Magnificent 7," a term introduced by Bank of America analyst Michael Hartnett just a couple of months ago. It describes seven of the top performing stocks in the benchmark S&P 500 index in 2023, all of which operate in the technology sector:
- Meta Platforms
- Apple
- Amazon
- Alphabet
- Microsoft
- Tesla
- Nvidia (NVDA 3.52%)
Compared to FAANG, the Magnificent 7 includes Microsoft, Tesla, and Nvidia, with Netflix removed entirely. So far in 2023, the clear standout in this group is Nvidia, because its stock has surged 217% this year, comfortably beating all of its Magnificent 7 peers.
Despite its runaway performance this year, here's why it's not too late for investors to buy into Nvidia for the long term.
Image source: Getty Images.
Nvidia has a dominant position in a fast-growing market
Nvidia is one of the world's leading semiconductor companies, specializing in graphics chips for personal computing, gaming, and data centers. The data center segment has been the source of most of the company's growth lately. That's because, despite challenging economic conditions, the corporate world is racing to upgrade its infrastructure to support new technologies like artificial intelligence (AI).
The data center is where AI comes to life, because it's home to the cloud, which is where the majority of companies store their valuable data. That information is used to train AI models, and Nvidia's latest A100 and H100 chips deliver the necessary computing power to do so more quickly and efficiently than any competing hardware on the market right now.
Nvidia CEO Jensen Huang is preparing the company for a massive data center growth cycle driven by this new frontier. He believes there is $1 trillion worth of existing data center infrastructure that will have to be upgraded to support AI and accelerated computing, and according to an estimate by global bank HSBC, Nvidia has a 90% market share in that segment.
Competition is starting to grow, with Advanced Micro Devices recently unveiling its new MI300 data center chips for AI workloads. But Nvidia's hardware is already the go-to choice for the world's largest cloud operators from Microsoft Azure to Oracle Cloud Infrastructure, so it won't be easy for AMD to make inroads.
Wall Street expects Nvidia's financial growth to blast off
Wall Street analysts have raced to recalculate their numbers following Nvidia's financial results for the fiscal 2024 first quarter (ended April 30), which caught just about every investor off guard in the best possible way.
The company generated $7.2 billion in revenue, which was far above the Street's estimate of $6.5 billion, and it also beat on the bottom line. The result was driven by its data center segment, which delivered a record-high $4.3 billion in revenue thanks to -- you guessed it -- demand related to artificial intelligence development.
But Nvidia's guidance for the next quarter featured the biggest surprise. It expects to deliver $11 billion in revenue during Q2 (ending July 31), whereas analysts predicted that number to come in at around $7.1 billion.
As a result, Wall Street drastically increased its consensus forecast for Nvidia's fiscal 2024 full-year revenue; it's now expected to grow by a whopping 59% compared to fiscal 2023, to $43 billion.
Nvidia entered the $1 trillion club, but its stock is still a buy
Let me be clear: Nvidia stock is wildly expensive by just about every metric. Based on the company's trailing-12-month earnings per share of $3.06 and its current stock price of $454.69, it trades at a price-to-earnings (P/E) ratio of 148.6. That's about 4.5 times more expensive than Nvidia's peers in the tech sector, represented by the Nasdaq-100 index, which trades at a P/E of 31.7.
Plus, based on Nvidia's $25.8 billion in trailing-12-month revenue and its current market valuation of $1.1 trillion, its stock trades at a price-to-sales (P/S) ratio of 43.3. That makes it about 5 times more expensive than its closest competitor, AMD, which trades at a P/S ratio of just 8.1.
But Nvidia stock still looks attractive because of the company's growth rate. If its revenue really does increase by 59% in fiscal 2024 to $43 billion, its forward P/S ratio is a more reasonable 26. Hypothetically, if its revenue grew by 59% again in fiscal 2025 to $68 billion, its forward P/S would be 16 relative to that result.
The stock market has always been forward-looking. Investors mostly care about what's coming, and Nvidia is on the cusp of a $1 trillion opportunity in AI data center chips alone. Considering the company's dominant market share, its revenue might continue to beat expectations for years to come.
Therefore, investors who can afford to hold Nvidia stock for five years (or more) could still do extremely well despite its 2023 gains topping the rest of the Magnificent 7 already.
