What happened
Shares of Nvidia (NVDA 6.18%) surged higher Monday, jumping as much as 6.8%. As of 2:30 p.m. ET, the stock was still up 6.1%.
The catalyst that sent the semiconductor specialist higher was bullish commentary by a Wall Street investment bank.
So what
To kick off the week, Morgan Stanley (MS 0.29%) analysts named Nvidia the bank's "top pick" in a note to clients, ahead of the company's fiscal 2024 second-quarter financial release, scheduled for Aug. 23. After reaching a new all-time high, the stock had fallen roughly 14% as of Friday's market close. The analysts call the recent decline "a good entry point," according to The Fly.
Recent supply chain limitations aside, the firm is still expecting a "meaningful beat and raise quarter," even as some investors question the stock's lofty valuation. The analysts also note that the implied data center revenue of $7.5 billion is racing toward $15 billion in the coming quarters and shows no signs of slowing. Furthermore, the accelerating adoption of AI should continue to fuel demand.
At the same time, Morgan Stanley maintained its overweight (buy) rating and $500 price target, which suggests potential upside for investors of 22% compared to Friday's close.
Now what
Nvidia has become the poster child for generative AI. When the company announced the results for its fiscal 2024 first quarter (ended April 30), not only was its growth more robust than expected, but its forecast was a stunner. Nvidia guided for revenue growth of 64% year over year in Q2, citing strong demand for the processors used for AI.
Pundits have taken sides, debating whether the valuation has gotten ahead of the opportunity, and with good reason. The stock is currently selling for 51 times forward earnings and 18 times next year's sales, which is certainly frothy by either measure.
Yet the argument to continue to hold or even buy more is compelling. While estimates vary, Morgan Stanley analysts argue the market for AI is massive, conservatively estimated at $6 trillion. Furthermore, advances in AI are possible because of Nvidia's increasingly robust processors, which provide the computational horsepower necessary to bring generative AI to life.
For investors with a long outlook, it's best to buy Nvidia (if you haven't already), leave it in your portfolio, and be prepared for a bumpy -- but profitable -- ride.
