Nvidia (NVDA -0.29%) has more than tripled in value in 2023, and investors who bought shares of the chipmaker at the end of last year are now sitting on massive gains of 237%. That huge price jump probably has some investors asking if it is too late to buy into this high-flying semiconductor stock.
After all, Nvidia stock is now trading at a whopping 113 times trailing earnings and 36 times sales. Those multiples are way higher than its price-to-earnings ratio of 62 and sales multiple of 13 at the end of 2022. It is also worth noting that Nvidia stock is way more expensive right now compared to its five-year sales multiple of 19 and earnings multiple of 73.
So should investors put their money into Nvidia stock in anticipation of more gains? Let's find out.
Nvidia's rich valuation is justified
We have already seen how richly Nvidia stock is valued right now, but a closer look at how fast the company is growing tells us just why that's the case. Nvidia's revenue in the second quarter of fiscal 2024 (for the three months ended July 30, 2023) jumped 101% year over year to $13.5 billion. Its non-GAAP earnings grew at an even faster pace of 429% to $2.70 per share last quarter.
The company is expecting even stronger growth in the current quarter. It projects revenue of $16 billion in fiscal Q3 along with a non-GAAP gross margin of 72.5%. For comparison, Nvidia delivered $5.9 billion in revenue and an adjusted gross margin of 56% in the same period last year, suggesting that another massive year-over-year jump is in the cards.
What's more, analysts expect Nvidia to sustain its outstanding growth over the next couple of years as well.
NVDA Revenue Estimates for Current Fiscal Year data by YCharts
Given that Nvidia reported $27 billion in revenue in fiscal 2023, the company is on track to more than triple its revenue in the space of just three years, as the chart above indicates. More specifically, the chipmaker's revenue is on track to increase at a compound annual growth rate (CAGR) of 50% for the next three years. That's higher than the CAGR of 35% seen in the last three years as Nvidia finished fiscal 2020 with $10.9 billion in revenue.
The terrific acceleration that's expected in Nvidia's revenue and earnings indicates why the company's forward sales and earnings multiples are way lower than its trailing multiples mentioned earlier.
NVDA PS Ratio (Forward 1y) data by YCharts
However, there is a possibility that Nvidia will clock much stronger growth than what analysts are anticipating, for one simple reason -- artificial intelligence (AI).
AI could give Nvidia a bigger boost
AI has turned out to be a massive growth driver for Nvidia, especially for the company's data center business. Its graphics cards are being deployed in AI servers for training AI models and also for inferencing purposes. As a result, the company's data center revenue tripled last quarter and produced 76% of the company's top line.
This also explains why the company's margins increased substantially. Nvidia is enjoying impressive pricing power in the market for AI GPUs (graphics processing units). Its A100 GPUs, which were deployed in tens of thousands of units to train ChatGPT, are reportedly priced between $10,000 and $15,000. Meanwhile, the H100 GPUs, which are the successor to the A100, are priced at more than $30,000. It is estimated that Nvidia's next generation of AI GPUs could carry a 40% premium compared to the H100.
All this indicates that Nvidia's pricing power could keep improving in the AI market. When combined with the company's solid market share of more than 90% in AI GPUs, Nvidia seems set to enjoy a mix of solid growth in both volume and pricing. This explains why Nvidia's AI-specific revenue is expected to jump 10 times by 2027 to an annual run rate of a whopping $300 billion, according to Vijay Rakesh of Mizuho. The analyst expects Nvidia to generate $25 billion to $30 billion in AI revenue in 2023.
While that may seem like a very ambitious forecast, Nvidia seems set to deliver outstanding growth over the next five years if it can achieve even half of Mizuho's forecast. And that seems quite achievable, as the AI chip market is expected to add $210 billion in revenue through 2027, according to TechNavio. Nvidia needs to corner 70% of this market to add an additional $150 billion in revenue, which means that the company can afford to lose some share in the AI GPU market and still enjoy huge gains.
Assuming Nvidia does hit $150 billion in revenue in five years and maintains its five-year sales multiple of almost 20, its market cap could jump to $3 trillion from $1.1 trillion currently. So Nvidia is likely to remain a top growth pick thanks to AI, which is why it isn't too late for investors to buy the stock.
