Is NVIDIA (NVDA) Poised to Make a Breakout Growth Move in October?

Artificial intelligence has been one of the major talking points this year, with NVIDIA Corporation (NVDA) hogging most of the limelight. Breakthroughs in artificial intelligence (AI), such as the advent of the large language model-based (LLM) chatbots, have driven NVDA’s outperformance this year.

In this piece, I have discussed why it could be wise to wait for a better entry point in the stock.

NVDA currently finds itself in the sweet spot as it faces several tailwinds brought about by the buzz around generative AI. NVDA makes graphic processing units (GPUs) that provide the necessary processing power to Generative AI applications. UBS analyst Timothy Arcuri said ChatGPT used 10,000 NVDA GPUs to train the model.

Investors’ interest in AI helped NVDA surpass the $1 trillion market capitalization. During the second quarter, NVDA reported record revenue. Its EPS and revenue beat the consensus estimates by a wide margin. While its EPS was 30.3% above the analyst estimates, its revenue beat the consensus estimate by 21.8%.

NVDA’s strong performance was led by its data center business, which includes the A100 and H100 AI chips needed to build and run AI applications. Its data center revenue jumped 171% year-over-year to $10.32 billion. NVDA founder and CEO Jensen Huang said, “A new computing era has begun. Companies worldwide are transitioning from general-purpose to accelerated computing and generative AI.”

According to Wedbush, artificial intelligence will be worth $800 billion to businesses over the next ten years. For the third quarter, NVDA has forecasted its revenue to be $16 billion, plus or minus 2%. Its non-GAAP gross margins are expected to be 72.5%, plus or minus 50 basis points.

NVDA’s growth prospects, strong financial performance, and guidance have all boosted its stock price performance. The stock has gained 205.8% in price year-to-date and 238.3% over the past year to close the last trading session at $446.88.

Here’s what could influence NVDA’s performance in the upcoming months:

Robust Financials

NVDA’s revenue for the second quarter ended July 30, 2023, increased 101.5% year-over-year to $13.51 billion. Its non-GAAP operating income rose 486.9% over the prior-year quarter to $7.78 billion. The company’s non-GAAP net income increased 421.7% year-over-year to $6.74 billion. Also, its non-GAAP EPS came in at $2.70, representing an increase of 429.4% year-over-year.

Favorable Analyst Estimates

Analysts expect NVDA’s EPS for fiscal 2024 and 2025 to increase 225% and 49.4% year-over-year to $10.85 and $16.21, respectively. Its fiscal 2024 and 2025 revenues are expected to increase 99.3% and 45.1% year-over-year to $53.75 billion and $78 billion, respectively.

Stretched Valuation

In terms of forward EV/EBITDA, NVDA’s 39.27x is 193.7% higher than the 13.37x industry average. Likewise, its 20.44x forward EV/Sales is 697.6% higher than the 2.56x industry average. Its 41.17x forward non-GAAP P/E is 93.1% higher than the 21.32x industry average.

Solid Historical Growth

NVDA’s revenue has grown at a 35.8% CAGR over the past three years and a 22.4% CAGR over the past five years. Its EBITDA has grown at a 41% CAGR over the past three years. Its net income and levered FCF have grown at 45% and 39.7% CAGRs over the past three years.

High Profitability

In terms of the trailing-12-month net income margin, NVDA’s 31.60% is significantly higher than the 2.03% industry average. Likewise, its 37.88% trailing-12-month EBITDA margin is 313% higher than the industry average of 9.17%. Furthermore, the stock’s 4.82% trailing-12-month Capex/Sales is 99.1% higher than the industry average of 2.42%.

POWR Ratings Reflect Uncertainty

NVDA has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. NVDA has a D grade for Stability, consistent with its 1.74 beta. Its favorable analyst estimates justify its A grade for Sentiment.

It has an F grade for Value, in sync with its stretched valuation.

NVDA is ranked #27 out of 90 stocks in the Semiconductor & Wireless Chip industry. Click here to access NVDA’s Growth, Momentum, and Quality ratings.

Bottom Line

NVDA remains well-positioned to capitalize on the multi-billion-dollar opportunity in the artificial intelligence space, as its graphic processing units (GPUs) are essential in powering generative AI tools.

However, the stronger-than-expected economic data in recent months is expected to push the Fed to keep interest rates higher for longer. This will likely keep tech stocks under pressure as they often trade at a premium because of the promise of rapid growth.

NVDA has been on a tear since the start of the year and is trading at an expensive valuation. Despite its solid growth prospects, if the Fed keeps the interest rates higher for longer, the stock might come under selling pressure due to its lofty valuation. Therefore, it could be wise to wait for a better entry point in the stock.

How Does NVIDIA Corporation (NVDA) Stack Up Against Its Peers?

NVDA has an overall POWR Rating of C, equating to a Neutral rating. You may check out the stocks within the Semiconductor & Wireless Chip industry possessing an A (Strong Buy) or B (Buy) rating: Renesas Electronics Corporation (RNECF), Everspin Technologies, Inc. (MRAM), and STMicroelectronics N.V. (STM). Click here to access more Buy-rated Semiconductor & Wireless Chip stocks set to outperform.

What To Do Next?

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NVDA shares were trading at $454.84 per share on Friday morning, up $7.96 (+1.78%). Year-to-date, NVDA has gained 211.35%, versus a 13.41% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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