Leading accelerated computing player Nvidia (NVDA -1.99%) has emerged as a Wall Street darling amid the artificial intelligence (AI) frenzy of 2023. The launch of OpenAI's famous chatbot ChatGPT also highlighted the role of Nvidia's graphics processing units (GPUs) in training and deploying large language models (LLMs), which drive generative AI applications like ChatGPT. Subsequently, many enterprises started increasingly adopting generative AI technologies, further spurring demand for the company's AI chips. This has been a catalyst for Nvidia in 2023.
Nvidia's share price is up by nearly 219% this year, thanks to its position as a leading GPU provider in the ongoing AI revolution. Can the company continue this pace of share price growth and reach $1,000 per share in 2024? Let's find out.
Impressive financial performance
Nvidia has posted stellar financial performance in its fiscal 2024 third quarter (ending Oct. 29, 2023), with revenues soaring by 206% year over year to $18.1 billion and net income surging by 1,259% year over year to $9.2 billion.
The data center segment (which accounted for almost 80% of Nvidia's total revenues) saw revenues jump year over year by 279% to $14.5 billion. Additionally, while the company's gaming segment was grappling with an excessive inventory buildup of GPUs in the past year, it is now showing signs of recovery in line with the overall PC market. In the third quarter, the company's gaming business reported revenues of $2.86 billion, up 81% year over year.
Multiple AI-driven opportunities
Unsurprisingly, the data center business is the biggest near-term opportunity for Nvidia. CEO Jensen Huang expects data centers to spend nearly $1 trillion in the next four years on upgrading general computing to accelerated computing infrastructure -- thereby equipping themselves to handle complex AI workloads. With Nvidia accounting for nearly 91.4% of the enterprise GPU market (in 2021), the company's cutting-edge AI chips (H100 and upcoming H200) are well positioned to leverage this opportunity.
Furthermore, the demand for Nvidia's proprietary InfiniBand networking technology has grown fivefold year over year in the third quarter, to enhance scale and performance while training LLMs. At the end of the third quarter, Nvidia has already crossed the $10 billion annualized run rate for its networking solutions.
Rather than focusing only on hardware, Nvidia has also made significant strides in its software strategy. The company expects its software, support, and services offerings to rake in around $1 billion in annual revenues in fiscal 2024. Nvidia expects its DGX Cloud service and AI enterprise software to be used extensively to train and deploy LLMs.
Nvidia's software-hardware ecosystem has helped it build a highly sticky customer base.
High valuation may be a deterrent
As of this writing, Nvidia is trading at a price-to-sales (P/S) ratio of 25.9, far more than the median semiconductor industry valuation of 2.9. A few analysts also think that the company deserves this premium valuation based on its prowess in accelerated computing, market-leading AI-focused data center offerings, and stellar financial numbers.
However, some risks should not be ignored. The recent U.S. restrictions on the export of advanced AI chips to China are a significant challenge for the company. With several small chip players chasing Nvidia's nearly 90% share in the $7 billion Chinese chip market, the company's top line may take a hit in the coming quarters.
Nvidia's P/S ratio has also increased in tandem with the share price in 2023. Therefore, with the current valuation assuming near-perfect execution for the company, chances of future multiple expansion amid the current difficult geopolitical environment appear slim.
So let's assume that the average P/S ratio reverts to Nvidia's five-year average multiple of 22.58 (which is still quite high) in 2024. Analysts expect Nvidia's revenues to be nearly $90 billion in fiscal 2025 (ending Jan. 31, 2025). Multiplying these numbers gives us an estimate of Nvidia's market capitalization of $2 trillion in 2024 -- less than double the company's current market capitalization of $1.15 trillion. Assuming that the share count remains constant, we can expect Nvidia's share price to reach around $820 in the best scenarios.
Hence, even with highly optimistic back-of-napkin calculations, Nvidia does not seem to reach $1,000 per share in 2024. But that doesn't mean that there is no growth potential in this stock. A bullish price target of over $800 is also impressive -- suggesting an upside of more than 71% in the next 12 months.
As such, it makes sense for retail investors to consider buying a small stake in the stock, even at elevated levels.
