Shares of Nvidia (NVDA -4.69%) have more than tripled in 2023 -- and rightly so -- as the semiconductor giant has been delivering eye-popping growth on the back of tremendous demand for its graphics processing units (GPUs). The company's GPUs are being deployed in massive quantities to train artificial intelligence (AI) models.
However, the terrific surge in Nvidia stock means that it is now trading at an expensive valuation. The stock currently sports a price-to-sales ratio of 34, while its trailing earnings multiple sits at 109. Those figures are well above Nvidia's five-year average sales ratio of 19 and trailing earnings multiple of 74. But it isn't too late for investors to buy Nvidia stock despite its expensive valuation. Here's why.
Nvidia's outstanding growth justifies its valuation
Nvidia's revenue and earnings have shot up sharply lately. Its earnings growth has outpaced the jump in its stock price this year, which explains why the company's earnings multiple has come down significantly.
NVDA Revenue (Quarterly) data by YCharts
More specifically, Nvidia's earnings soared a massive 429% year over year in the second quarter of fiscal 2024 (the three months ended July 30, 2023) to $2.70 per share, driven by a 101% increase in its revenue to $13.5 billion. It is worth noting that the shares were trading at a significantly higher price-to-earnings ratio earlier this year, which means that investors are getting a better deal on the stock now.
Additionally, Nvidia is expected to grow at an even stronger pace going forward. As a result, its forward sales and earnings multiples are much lower than its trailing multiples.
NVDA PE Ratio (Forward 1y) data by YCharts
All of this indicates that those who have missed Nvidia's red-hot rally can still consider buying the stock, especially given the potential upside it could deliver. The shares carry a 12-month median price target of $623.75 as per a consensus of 44 analysts, which points toward a 37% possible gain from current levels. The Street-high price target stands at $1,100, indicating that the bulls expect the stock to at least double from where it is right now.
That's why investors would do well to look past Nvidia's valuation because the company's accelerating growth -- thanks to AI -- means that its rally is likely to continue.
Nvidia's terrific growth is just getting started
Investors should note that Nvidia started its current fiscal year on the back foot. The company's revenue in Q1 of fiscal 2024 was down 13% year over year to $7.2 billion, while adjusted earnings declined 20% to $1.09 per share. The second quarter turned out to be way better, though.
And now, for Q3, Nvidia forecasts $16 billion in revenue. The company has generated $20.7 billion in revenue in the first six months of the current fiscal year, which means that its revenue run rate is set to accelerate big time. That's not surprising given Nvidia is busy procuring more supplies of its data center graphics cards that power AI servers. Plus, it is all set to expand its addressable market by moving into a new niche.
Analysts are anticipating Nvidia's revenue to come in at over $17.5 billion in the final quarter of the current fiscal year. That could take its annual revenue to $54.6 billion in fiscal 2024 (which will end in January of next year), more than double fiscal 2023's sales of almost $27 billion. What's more, Nvidia's fiscal 2025 revenue is expected to jump to $81 billion, which means that the company's top line could triple in the space of just two fiscal years.
While those estimates seem very ambitious, there is solid reason to believe that Nvidia could achieve them. The company is expected to ship 550,000 of its flagship H100 data center graphics cards this year. The basic H100 chip starts at $30,000, which means that Nvidia is on track to generate $16.5 billion from this product alone. However, that figure could be higher considering that more powerful versions of the H100 could go for a whopping $70,000.
Financial Times (via Tom's Hardware) reports that Nvidia could triple the output of the H100 processors in 2024, producing between 1.5 million to 2 million units. If that's indeed the case, Nvidia is likely to see a massive jump in its revenue and earnings next year because the H100 reportedly costs just over $3,300 to manufacture, according to third-party estimates.
In all, there is a solid chance that Nvidia could meet -- or even exceed -- the ambitious growth that analysts are expecting from it given the pace at which the demand for AI chips is expected to explode, as well as the company's dominant position in this market. All this suggests that investors who haven't bought this high-flying AI stock yet can still consider doing so.
