Nvidia Soars 230% in 2023, Is It a Good Buy in 2024?

In 2023, Nvidia Corporation (NVDA) emerged as a standout performer in the world of stocks, with its shares surging by a staggering 230%. This meteoric rise catapulted Nvidia into the ranks of the world’s largest companies, making it the sixth-largest by market capitalization and officially inducted into the trillion-dollar club. While many have questioned whether Nvidia’s stock is overvalued, a deeper look reveals that the company’s impressive performance is not merely driven by hype; it’s rooted in solid fundamentals and soaring demand.

Nvidia’s Critical Role in the Digital Age

At the heart of Nvidia’s success lies its high-performance graphic processing units (GPUs) and a suite of hardware and software solutions that are indispensable to data centers. In today’s digitally-driven world, data centers are the lifeblood of society and commerce, serving as the backbone for a wide array of essential services. Cloud-based software, data storage, payment processors, banks, and generative AI software all rely on data centers to function efficiently.

The Challenge of Meeting Soaring Demand

One of the most significant hurdles Nvidia faced in 2023 was keeping up with the insatiable demand for its products and services. Even as it heads into 2025, the company’s leadership is confident that the demand for data center solutions will continue to rise. During a recent conference call, Nvidia’s CEO, Jensen Huang, expressed unwavering belief in the growth potential of data centers, citing several reasons for this optimism.

Supply Chain Mastery: A Key to Nvidia’s Success

Nvidia’s commitment to meeting the skyrocketing demand is evident in its robust global supply chain. This supply chain prowess is critical for the company to maintain a significant lead over its competitors and consistently surpass analyst estimates for both revenue and profits. As we dive deeper into the factors behind Nvidia’s 2023 surge, it becomes clear that supply, demand, and pricing power play pivotal roles in the company’s success.

Unpacking the Reasons Behind Nvidia’s Stock Surge

The remarkable rise of Nvidia’s stock in 2023 can be attributed to fundamental principles of finance: supply, demand, and pricing power. Nvidia’s products are so highly sought after that the company effectively sets the market standards, and customers are willing to pay a premium for its offerings. This surge in demand has had a profound impact on the company’s financials, leading to eye-popping margin levels.

Soaring Margins: A Testament to Nvidia’s Dominance

Nvidia’s financial strength is exemplified by its soaring margins. The gross marginGross margin is a critical financial metric that plays a pivotal role in evaluating a company's financial health and profitability. It is a percentage that indicates how efficientl... More reached an impressive 74%, while the operating marginThe operating margin is a critical financial metric that measures a company's ability to generate profit through its core operations. It provides valuable insights into a company's... More stood at an astonishing 57% in the last quarter. This level of profitability sets Nvidia apart from its competitors like Advanced Micro Devices (AMD) and Intel (INTC), which operate in different leagues altogether.

NVDA has a Profit MarginIn the dynamic world of business, profitability is a fundamental metric that encapsulates a company's ability to generate earnings from its operations. Profit margins, expressed as... More of 42.09%, ranking among the industry’s top performers. It outperforms 98.10% of its peers. The Operating Margin of NVDA is 45.94%, surpassing 98.10% of industry peers. NVDA’s Gross Margin of 69.85% is one of the industry’s best, outperforming 92.38% of its peers. However, both NVDA’s Profit Margin and Operating Margin have declined in recent years.

Data Center Revenue: The Driving Force

The primary driver behind Nvidia’s remarkable performance is its Data Center segment. This segment recorded a staggering $14.5 billion in revenue in the last quarter alone, showcasing a phenomenal year-over-year growth rate of 279%. Moreover, the growth trend remains robust, with a quarterly sequential growth rate of 41%.

Diversification and Future Potential

While data center growth has been exceptional, Nvidia recognizes the importance of diversification. The gaming segment, for instance, witnessed an 81% year-over-year growth last quarter, reaching $2.9 billion in revenue. Additionally, Nvidia sees immense potential in the automotive and robotics sectors, with the belief that the autonomous machine market will eventually rival the size of the data center market.

Strong Cash FlowThe cash flow statement provides a detailed overview of the cash inflows and outflows of a company over a specified period of time. It includes cash received from operations, inves... More and Share Repurchase Program

One of the key performance indicators (KPIs) highlighting Nvidia’s financial health is its robust cash flow. Free cash flow (FCF) has surged by 400% over fiscal 2023 through the first three quarters of fiscal 2024, reaching an impressive $17.5 billion over the trailing twelve months (TTMs).

Furthermore, Nvidia has initiated a significant share repurchase program, which resulted in the removal of $10 billion worth of stock from circulation in fiscal 2023. In fiscal 2024, the company has already repurchased $6.9 billion in shares, with another $25 billion authorized for future buybacks. Shareholders can anticipate further authorizations in the future.

Valuation and Future Outlook

As we look ahead, it’s essential to assess Nvidia’s valuation and its future outlook. Analysts’ average earnings per shareEarnings per share (EPS) is a fundamental financial metric that provides valuable insights into a company's profitability. This widely used indicator helps investors and analysts g... More (EPS) estimate for fiscal 2025 stands at over $20.50 per share. This estimate positions Nvidia with a price-to-earningsThe price-to-earnings ratio, often abbreviated as P/E ratio, is a fundamental metric used by investors and analysts to evaluate the relative value of a company's shares in the stoc... More (P/E) ratio of approximately 24 based on fiscal 2025 projections. Remarkably, this P/E ratio is lower than that of tech giant Microsoft (MSFT), dispelling concerns of severe overvaluation.

Revenue and EPS Growth Is Accelerating

NVDA demonstrates robust EPS growth, with a significant increase of 130.50% in the past year. Over the years, the EPS has shown a steady growth rate of 23.64% annually. Similarly, NVDA exhibits strong revenue growth, with a 57.07% increase in the last year. Over the past years, NVDA has consistently achieved a remarkable average annual revenue growth rate of 22.66%. Looking ahead, NVDA is expected to maintain a strong growth trajectory in EPS, with a projected annual growth rate of 57.28%. Additionally, the revenue is anticipated to experience a very strong growth of 38.71% on average in the coming years. Furthermore, a comparison of the EPS and revenue growth rates between the past and future years indicates an accelerating growth trend.

Potential Risks and Challenges

While Nvidia’s success is undeniable, it’s not without risks and challenges. One potential threat is the risk of demand destruction. Companies, driven by the urgency to secure Nvidia’s products, may have stockpiled more than they actually need due to supply constraints. If demand eases even slightly, Nvidia could face short-term headwinds as companies work through their excess inventory.

Moreover, the U.S. government’s restrictions on high-performance chip exports to certain regions, notably China, have posed challenges. While Nvidia has been significantly reliant on these markets, the company is actively exploring alternative avenues to compensate for potential revenue declines.

The Long-Term View on Nvidia

Bottom-line: Nvidia is undeniably a remarkable company with a bright future ahead. While its share price has witnessed rapid growth, it remains a solid portfolio holding for investors with a long-term perspective. However, the rapid multiplication of share prices has already occurred, prompting some to explore alternative opportunities in the thriving AI space. Nvidia’s journey in the coming years will undoubtedly be shaped by its ability to navigate challenges, seize new opportunities, and continue to meet the world’s growing demand for cutting-edge technology.