There's little doubt that the hottest topic on Wall Street right now is artificial intelligence (AI). In fact, as of mid-February, more than a third of the S&P 500 companies that had reported earnings mentioned AI on their conference calls. This is a clear signal that companies are doing everything they can to highlight their AI credentials, whether they're truly meaningful or not.
The undisputed poster child for the AI boom has been Nvidia (NVDA +2.41%). Over the past 12 months, the company's stock has rocketed up 298% as its revenue has tripled. This explosive growth over such a short timeframe likely has investors wondering if they've missed the boat. Let's dig in and see if it's too late to buy Nvidia stock now.
This began with a lull
It wasn't that long ago that Nvidia appeared to be struggling and the market sentiment was sour. In three consecutive quarters at the end of 2022 and the beginning of 2023, Nvidia posted negative year-over-year revenue growth and its stock was down 66% from its late-2021 high.
NASDAQ: NVDA
Key Data Points
For those who follow Nvidia, this lull was not unexpected. The semiconductor industry is cyclical, and Nvidia's second-largest segment at the time, gaming, was experiencing weakness. Pandemic lockdowns in China and slow computer sales resulted in a Q3 2023 (the quarter ending in October 2022) year-over-year revenue decline of 51%.
In that same quarter, Nvidia's largest segment, data centers, was up 31%. This increase was aided by cloud service providers and other industries, but in a sign of the times, there was no mention of AI. That boom was yet to come.
The AI revolution
In May 2023, Nvidia reported its results for the quarter ending in April (its Q1 of fiscal 2024). While overall revenue increased by 19%, the guidance for Q2 kicked off the AI revolution. CEO Jensen Huang highlighted generative AI as one of the two transitions the computer industry was going through, and Nvidia's Q2 outlook was the data to back it up.
After posting revenue of $7.2 billion in Q1, Nvidia forecast Q2 revenue of $11 billion, driven by data center demand for chips used for AI. This guidance represented a year-over-year revenue increase of 100%, and we were off to the races. The next three quarters did not disappoint.
|
Q2 2024 |
Q3 2024 |
Q4 2024 | |
|---|---|---|---|
|
Revenue |
$13.5 billion |
$18.1 billion |
$22.1 billion |
|
Year-over-year growth |
101% |
206% |
265% |
Data source: Nvidia
Is it too late to buy Nvidia?
At first glance, it would make perfect sense to think the stock's recent run-up has pushed its valuation beyond the point of considering, and that could be the case for some. However, it's worth looking a little deeper into the numbers.
Currently, Nvidia trades for 78 times trailing earnings (P/E), which is very expensive. However, its growth rate is expected to continue, so on a forward basis, it only trades for 38 times earnings. That's still expensive, but when you compare it to its closest AI competitor, Microsoft, it looks more reasonable.
NVDA PE Ratio (Forward) data by YCharts
This is still an expensive multiple for either company, but there's good reason to believe Nvidia's growth will outpace Microsoft's, so one could make the argument that Nvidia is the smarter choice. That said, it's important to remember that forward earnings multiples are based on expectations and nobody knows for sure what will happen.
Nvidia could continue to reward shareholders, but patient investors may also benefit from waiting until the red-hot AI rush starts to cool. This is, after all, a cyclical industry, and the cycle should eventually turn around, providing better buying opportunities.
