In many ways, 2023 has been a tale of two markets -- and with apologies to Charles Dickens, it was the best of times, it was the worst of times. While many stocks are still reeling from last year's shellacking, so far this year the Magnificent Seven stocks (presented below in alphabetical order) have all outperformed the S&P 500 index's 14% gain by a wide margin through the market close on Monday:
Alphabet -- Up 57%
Amazon -- Up 58%
Apple -- Up 38%
Meta Platforms -- Up 167%
Microsoft -- Up 39%
Nvidia (NVDA -1.96%) -- Up 215%
Tesla -- Up 38%
The common thread woven through these companies is the intriguing potential resulting from artificial intelligence (AI). That said, investors might be surprised to learn that the stock that has been the best performer this year is also the one that Wall Street believes has the most upside over the coming 12 to 18 months: Nvidia.
Image source: Getty Images.
More where that came from
The debut of generative AI, as illustrated by ChatGPT, helped demonstrate the vast productivity gains that were possible. Generating original content, drafting emails, creating presentations, compiling research, and writing code are just a few examples, with more coming to light with each passing day.
Nvidia is at the heart of this AI revolution. The parallel processing central to its graphics processing units (GPUs) allows the chips to perform a multitude of mathematical computations simultaneously. This not only helps them to render lifelike images and speed information around the cloud, but it is also key for meeting the heavy demands of AI.
Nvidia's latest innovation, the GH200 Grace Hopper Superchip, can now process five terabytes (5 trillion bytes) of data per second, a 25% increase compared to the previous version. This frantic pace of innovation has kept the company far ahead of any would-be competition.
Evidence is mounting
The results for its fiscal 2024 second quarter (ended July 30) offered proof positive that the AI revolution had begun. The company generated record revenue of $13.5 billion, up 101% year over year, while its diluted earnings per share of $2.48 soared 854%.
Management's guidance for the upcoming third quarter also turned heads. The outlook called for record revenue of $16 billion at the midpoint of its guidance, an increase of 317% year over year and 19% sequentially.
This provides just an inkling of what could be on the horizon as Nvidia is the spark igniting the AI revolution.
The 800-pound gorilla in the room
I'd be remiss if I didn't point out the biggest bear case for Nvidia -- namely, the stock's astronomical valuation. Even after its recent retracement, the stock sells for 42 times forward earnings and 14 times next year's sales, which even bulls have to admit is frothy. As a result, many value-minded investors will likely take a pass. though it's worth noting that the company's stock has rarely been cheap.
That said, while the valuation certainly seems egregious at first glance, it must be viewed in the context of the prevailing tailwinds. The adoption of AI is accelerating at an unprecedented pace, and it's difficult to overstate the magnitude of the opportunity.
Predictions concerning the size of the potential market for AI are all over the map, but even lowball estimates are eye-catching. Conservative estimates by investment banks Morgan Stanley and Goldman Sachs peg the market opportunity at $6 trillion and $7 trillion, respectively, by 2030. Even if those prognostications are on the high side, it illustrates that the opportunity is vast.
While Nvidia's valuation might seem outrageous, consider this: If the impact of AI is anywhere near what Wall Street believes and Nvidia's chips are the price of admission for the next generation of AI, most businesses will gladly pay up -- and investors should, too.
Wall Street is increasingly bullish on Nvidia
Despite the fact that the stock has tripled in price so far this year, some of the best and brightest on Wall Street believe Nvidia's best days are still to come. According to a consensus estimate of 53 analysts covering the company, the stock has a median price target of $634. This suggests potential gains for investors of 38% over the coming year compared to the closing price on Monday.
Furthermore, of the 53 analysts that issued an opinion in September, 50 rated it a buy or strong buy, and not a single one recommended selling.
With the adoption of AI accelerating and a ringing endorsement from Wall Street, Nvidia remains a buy, but investors should tread lightly due to its elevated valuation.
