2024 is off to a red-hot start. The S&P 500 has soared to record levels as mega-cap tech stocks, in particular, continue to fuel the artificial intelligence (AI) narrative.
The benchmark had last bottomed around October 2022. Much of the market rebound since, especially in 2023, was influenced by enthusiasm in AI, and this positive sentiment has so far poured over into this year.
In particular, the "Magnificent Seven" stocks, Microsoft, Alphabet, Apple, Amazon, Tesla, Meta Platforms, and Nvidia (NVDA 6.18%), have played a major role in pushing the market higher. Of this exclusive club, Nvidia may be the most important. Demand for the company's graphics processing units (GPUs) is off the charts, as generative AI has become the forefront of IT budgets.
Despite a 264% surge in the stock price over the last year, many investors see even brighter days ahead for Nvidia. Hans Mosesmann of Rosenblatt Securities has a price target of $1,400 for Nvidia stock -- implying about 61% upside from current trading levels.
Let's dig into why Nvidia could be headed even higher and assess if now is a good opportunity to scoop up some shares.
Nvidia is a money-printing machine
At the core of Nvidia's record-setting growth are its A100 and H100 GPUs. These GPUs are helping spearhead generative AI applications in machine learning, accelerated computing, and more.
NVDA Revenue (Quarterly) data by YCharts.
The graph above illustrates just how much growth Nvidia is witnessing at the moment. While revenue is increasing over 100% annually, it's the company's margin profile and cash-flow generation that really has me excited.
Nvidia's free cash flow grew more than sixfold last year, while gross margin expanded by nearly 16 percentage points. One of the biggest drivers for Nvidia right now is its superior pricing power. The company's semiconductor chips are widely considered to be the best in the industry -- outperforming fierce competition from the likes of Advanced Micro Devices and Qualcomm.
While the above analysis paints an encouraging picture, Nvidia is far from just a chip manufacturer. The company has been quietly dropping hints about where it sees further growth.
Image source: Getty Images.
Some catalysts to keep an eye on
In just the last few weeks, investors have gotten a glimpse into how Nvidia is deploying its newfound cash flow. Following a 13F filing in mid-February, investors learned that Nvidia has an investment in voice-recognition software developer SoundHound AI. At the moment, SoundHound AI is a small operation -- only generating about $46 million in revenue in 2023. The more curious aspect of this deal is why Nvidia may be interested in this area of artificial intelligence.
Apple has invested heavily in voice-powered assistants, demonstrated by its acquisitions of Siri and Shazam. Moreover, Amazon and Alphabet both leverage similar technology in their Internet-of-Things (IoT) smart home appliances. While the specifics of Nvidia's investment are still subject to speculation, I am intrigued by its interest in voice-recognition software given its cohorts have integrated the technology across many aspects of their respective businesses.
On top of the SoundHound AI stake, Nvidia also invested in a unicorn start-up called Figure AI. Figure AI is developing a humanoid robot, similar to Tesla's Optimus. Humanoid robots are still in early stages of development, but their ability to disrupt the labor market should not go overlooked.
Goldman Sachs recently referred to humanoid robots as an "AI accelerant" and sees an addressable market of $38 billion by 2035. This is more than a sixfold increase in market size potential from Goldman's initial research a year ago. The investment bank's rising forecast credited higher-than-anticipated spend in areas including large language models (LLMs) and capital expenditures (i.e., hardware). These are both areas that Nvidia is not only disrupting, but dominating.
Lastly, an area that I believe is very overlooked right now when it comes to Nvidia is software. The company is best known for its chips -- for now. But during the fourth-quarter earnings call, investors learned that Nvidia has a $1 billion run rate enterprise software business. This could end up being an extremely lucrative source of growth in the long run as software growth should help any margin deterioration from the legacy hardware operation as competition in the chip space rises.
A well-deserved premium valuation
Nvidia currently trades at a price-to-earnings (P/E) multiple of 72.7 -- far above its 10-year average of 55.5. Given the staggering rise in the stock price in a short amount of time, this premium shouldn't come as a surprise.
The bigger question to be thinking about is if Mosesmann's forecast could come true, or if it's a lofty projection outside of reality. My opinion? Nvidia stock is headed higher. Whether it reaches a price target of $1,400, however, is less of a concern to me.
The company is dominating the market for AI-powered chips. And while I expect competition to rise, I am encouraged and impressed by the company's investments in other growth areas. I think Nvidia is setting itself up to be a full-spectrum solution for AI applications -- from data centers, chips, and software. Despite its premium valuation compared to historical levels, I think now is as good a time as ever to buy shares in Nvidia. The long-term ride looks like it's just getting started.
