Nvidia (NVDA +0.04%) shares have quite literally carried the stock market higher. Since January 2023, the stock has advanced 740% due to enthusiasm about artificial intelligence. The S&P 500 returned 44% during the same period. Put differently, Nvidia accounted for roughly one-fifth of the gains in the S&P 500 during the last 18 months.
Nvidia reset its surging share price with a 10-for-1 stock split in June, its second split in three years. Shares have since traded sideways, but Wall Street remains bullish. Nvidia carries an average price target of $136 per share, implying 11% upside from its current price of $122 per share.
The highest price target comes from Hans Mosesmann at Rosenblatt, who believes Nvidia will climb 64% to reach $200 per share by June 2025. The lowest price target comes from Gil Luria at D.A. Davidson, who believes Nvidia will decline 26% to reach $90 per share during the same period.
Read on to learn more.
NASDAQ: NVDA
Key Data Points
Nvidia has an important competitive advantage in its ecosystem of supporting software
Nvidia's graphics processing units (GPUs) excel at accelerating complex data center workloads like artificial intelligence (AI). The company consistently sets performance records at the MLPerf benchmarks and objective tests for AI technologies, and it holds a greater than 80% market share in AI chips. But Nvidia is truly formidable because it has reinforced its dominance in AI chips with an ever-expanding ecosystem of supporting software.
Nvidia introduced the CUDA programming model in 2006, a software layer that allowed its GPUs (originally designed for computer graphics) to function as general purpose data center processors. "Millions of lines of code have been written over the years for CUDA that have made developing new AI applications easier when using Nvidia's chips," according to The Wall Street Journal.
More recently, Nvidia introduced AI Enterprise, a suite of pretrained models and software tools that streamline the development and deployment of AI applications across a broad number of use cases. For instance, the AI Enterprise suite includes frameworks for recommender systems, logistics route optimization, conversational assistants, cybersecurity threat detection, and autonomous robots.
Rosenblatt analyst Hans Mosesmann sees that as an important competitive advantage. "The real narrative lies in the software that complements all the hardware goodness," Mosesmann recently told clients. "We anticipate this software aspect will significantly increase in the next decade in terms of overall sales mix."
On the flip side, D.A. Davidson analyst Gil Luria is concerned that Nvidia derives most of its revenue from Amazon, Alphabet, Microsoft, and Tesla. Those four companies are developing their own AI chips to displace Nvidia GPUs. Luria thinks that competition will be problematic, stating, "Looking beyond the next four to six quarters, we believe a decline in demand for Nvidia compute is inevitable."
Both analysts make valid points, but the argument made by Mosesmann seems to trump the concerns raised by Luria. Competitors are indeed building custom AI chips, but history suggests they will need a comparable software ecosystem to truly displace Nvidia. For instance, Alphabet has been using custom AI chips called Tensor Processing Units (TPUs) for nearly a decade. But Nvidia GPUs remain the gold standard.
Indeed, Toshiya Hari at Goldman Sachs is not concerned about the competition. "We believe Nvidia will remain the de facto industry standard for the foreseeable future given its competitive advantage that spans hardware and software capabilities," he wrote in a note to clients. "Nvidia's annual introduction of new products and platforms sets a pace of innovation that keeps it at the forefront of the industry."
Wall Street has lofty expectations concerning Nvidia's revenue and earnings growth
Nvidia reported exceptional financial results in the first quarter of fiscal 2025 (ended April 28, 2024). Revenue increased 262% to $26 billion and non-GAAP net income surged 462% to $15.2 billion. CEO Jensen Huang said growth was "fueled by strong and accelerating demand for generative AI training and inference" solutions.
What makes Nvidia's first-quarter performance particularly impressive is that it comes on top of triple-digit growth in the three preceding quarters, as shown in the chart below.
Nvidia's revenue and non-GAAP net income have increased at a triple-digit pace for four consecutive quarters.
Going forward, Wall Street analysts have high expectations for Nvidia. The chart below shows the consensus revenue and non-GAAP net income estimates over the next five quarters.
Wall Street expects Nvidia to grow revenue and non-GAAP net income quickly over the next five quarters.
Nvidia stock trades at a tolerable valuation compared to Wall Street's earnings estimates
I mentioned earlier that Nvidia shares have gained 740% since the beginning of January 2023. After that price appreciation, investors may assume Nvidia sports an exorbitant valuation. But the stock currently trades at 72 times earnings, a discount to the three-year average of 87 times earnings and the five-year average of 80 times earnings.
Moreover, Wall Street expects Nvidia to grow earnings per share by 33% annually over the next three to five years. That makes the current valuation look tolerable. Investors should not kid themselves into thinking the stock is cheap. But Nvidia remains one of the best ways for patient investors to expose their portfolios to AI, a market forecast to grow by 36% annually through 2030.
