When Nvidia (NVDA 0.25%) reported its financial results three months ago, it set a high bar for growth. For its fiscal 2024 second quarter (ended July 30), management forecasted revenue of $11 billion, up 64% year over year and 53% quarter over quarter.
The driving force behind those robust estimates was the strong and accelerating adoption of artificial intelligence (AI). More specifically, the latest developments in generative AI and the promise of significant productivity improvements have caused a veritable stampede by businesses to integrate AI systems into their businesses.
When the company reported its financial results, Nvidia put to rest any notion that the AI boom was only hype. Now, some on Wall Street believe the stock could double over the coming 12 to 18 months after surging this year. Is that realistic, and what would Nvidia have to do to achieve that lofty goal?
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The catalyst
When Nvidia released its results after the market close on Wednesday, it isn't hyperbole to say its performance was stunning. The company generated revenue of $13.5 billion, up 101% year over year and 88% sequentially. The results were driven by strong sales from its data center segment -- particularly for processors used for AI -- with revenue of $10.3 billion, up 171% year over year and 141% sequentially.
The impact on profits was even more dramatic. Nvidia delivered adjusted earnings per share (EPS) of $2.70, up 429%. On a GAAP basis, EPS of $2.48 jumped an incredible 854%.
The results not only eclipsed Nvidia's outlook but also sailed past analysts' consensus estimates, which called for revenue of $11.22 billion and adjusted EPS of $2.09. Given the magnitude of Nvidia's outperformance, it's no wonder Wall Street is scrambling to upgrade the stock and increase price targets. But are analysts going too far?
The bullish calls
Ahead of Nvidia's earnings, the street-high price target for Nvidia was $1,000, suggesting potential upside for investors of 112% compared to Wednesday's closing price. BMO Capital Markets analyst Ambrish Srivastava made the call in a note to clients last month, citing the growing importance of the data center segment on Nvidia's results.
"As we look further out to the company's data center business, we now see the business growing to a $32 billion business a few years out versus our prior expectation of $25 billion," Srivastava wrote. He went on to say that he expected Nvidia's gross margin to expand due to the increasing importance of the software bundled with its processors.
In the wake of Nvidia's blowout financial results, enthusiasm on Wall Street surged. While many increased their expectations, Rosenblatt Securities analyst Han Mosesmann was the most bullish, boosting his price target from $800 to $1,100, suggesting potential gains for investors of 133% -- even after the stock's 222% rise so far this year.
In a note to clients after the results, Mosesmann said Nvidia's "epic print and guide two quarters in a row is simply unprecedented and just getting started." The analyst said that Nvidia made a strong case that its data center business, with an installed base of $1 trillion, "will shift to accelerated computing from general purpose compute for generative AI models (training and inference)." A wave of data center upgrades could supercharge Nvidia's results in the quarters to come.
So, can Nvidia stock climb to $1,100 over the coming 12 to 18 months, and if so, what will it take to get there?
Its guidance is telling
For its third quarter, Nvidia's outlook continued to ramp even higher. The company is guiding for revenue of $16 billion, an increase of 170% year over year. It's important to note that at least part of that difference is the result of Nvidia's dismal results this time last year during the downturn. That said, it would still represent back-to-back record-setting performances by the semiconductor specialist. In fact, excluding the current quarter, revenue would be nearly double any of the company's previous results. However, given the soaring secular tailwinds driving its accelerating performance, its outlook may well be conservative.
Perhaps, as importantly for investors, a greater portion of Nvidia's revenue is making its way to the bottom line. The company's profit margin increased from 28% in the first quarter to 46% in Q2. That trend should continue in the coming quarter, as Nvidia expects to add roughly $1 billion more in profits, which would boost its margin even further. As profits increase, investors will be more willing to pay up for the stock, even at a higher valuation (more on that in a minute).
We simply don't know how long this AI gold rush could go on, but Nvidia is the gatekeeper of the technology powering generative AI. Therefore, its results -- and, by extension, the stock price -- could go much higher.
The fine print
To be clear, it's highly unlikely that Nvidia will be able to continue along its current trajectory indefinitely. Furthermore, the stock's valuation -- even after a significant reset post-earnings -- is still in rarified territory. It currently sports a forward price-to-earnings (P/E) ratio of 58 and is selling for 20 times forward sales.
Some might think these valuations are irrational, but even if that's true, investors would do well to remember the words of noted economist John Maynard Keynes: "Markets can remain irrational longer than you can remain solvent." Furthermore, with no real competition to speak off in the AI chip space, Nvidia has the market largely to itself. That could change, of course, but it hasn't yet.
While estimates vary widely, most experts agree the market for generative AI could be worth trillions of dollars. As one of the primary beneficiaries of that trend and with its performance thus far as a guide, it isn't that hard to imagine Nvidia's stock doubling from here.
