In my opinion, one of the best stocks of the year has been Nvidia (NVDA -1.97%). The stock returned more than 230% this year, which is nothing short of incredible considering the size of Nvidia. Entering 2023, the market thought Nvidia was worth $364 billion. Now, it values the company at $1.2 trillion.
That kind of movement is practically unheard of, and it gets me thinking: What's the limit for Nvidia's stock? Could the stock break through the $550 threshold by the end of the year? Or could it end even higher? Let's take a look.
Nvidia posted unbelievable results this year
The driving force behind Nvidia's stock has been artificial intelligence (AI). Creating an AI model requires vast computational resources, often requiring building a supercomputer or renting out a data center computing capacity. Both options utilize graphics processing units (GPUs), which excel at running arduous workloads. Furthermore, these devices don't use just one or two GPUs; they use thousands connected together to create a system with incredible computing power.
Nvidia's GPUs are the undisputed best-in-class for handling AI workloads, and the company has seen a massive sales boost as a result.
In the second quarter of fiscal year 2024 (ended July 30), Nvidia's revenue rose 101% year over year to $13.5 billion. But that's just the beginning. Management also guided third-quarter revenue to be $16 billion, indicating 171% year-over-year growth.
This guidance will be tested when Nvidia reports on Nov. 21, but with the stock nearing an all-time high, the market clearly thinks it can deliver.
But what will it take to send Nvidia stock even higher? Let's look at some expectations.
The company has incredibly high expectations over the next year
An average of 32 Wall Street analysts expect Nvidia's Q3 sales to exceed expectations at $16.1 billion. But they also expect guidance of about $17.7 billion (indicating 193% year-over-year growth) for the fourth quarter.
That's the benchmark for Nvidia, and if it doesn't meet or exceed that threshold, don't be surprised if the stock takes a tumble. That's because these expectations are already baked into the stock price.
Nvidia's stock trades for 117 times trailing earnings, which is far higher than many would ever consider buying shares at. But when forward earnings are considered (which utilize analyst projections), the stock trades at 45 times earnings.
NVDA P/E Ratio data by YCharts.
That means Nvidia's earnings need to increase by 163% over the next year without the stock price moving to be worth 45 times trailing earnings (still an expensive price). Those are some high expectations, and Nvidia will need to execute flawlessly over the next few reports to hit those levels.
But with generative AI products increasing in the market, it's a promising sign for Nvidia, as its products are likely behind many of these innovations.
So, could Nvidia stock hit $550 before 2024 arrives? I'd say absolutely. But it is equally likely to fall below $400 if guidance comes up light for Q4. As a result, I'll be a watcher of Nvidia's Q4 results, not a buyer or seller.
