The share price of Nvidia has soared to unprecedented heights, recently hitting $791 by the end of February, and now approaching $900. This surge marks an extraordinary 80% gain year-to-date, building upon an already remarkable increase of 240% throughout 2023. Such phenomenal growth has propelled Nvidia to a market capitalisation exceeding $2.2 trillion, placing it ahead of tech giants like Alphabet and Amazon, and closely trailing behind Apple, which stands at $2.6 trillion.
Numerous factors have contributed to this remarkable performance. Firstly, Nvidia has solidified its position as a lead player in the thriving Artificial Intelligence (AI) market. The company's robust graphics processing units (GPUs) serve as vital components for constructing and operating AI models, which are not only catalysing innovation across various industries, but countries themselves have entered into some kind of AI arms race so as not to be left behind. Supporting this idea in the numbers, Nvidia's recent fiscal Q4 2024 earnings report exceeded expectations, with revenue soaring by an impressive 265%, further bolstering investor confidence in the company's prospects.
However, not all observers are convinced of Nvidia's sustained upward trajectory. Some analysts caution against a potential "AI bubble" and express reservations about the stock's current valuation, arguing that the recent surge in price may not be entirely justified by the company's underlying fundamentals. Possibly the near-term euphoria and AI ramp up will cause more competition down the line and eventually a normalisation of the industry where customers are not falling over themselves for GPUs.
Let’s consider the current valuation in terms of analyst expectations. The revenue for the 2024 financial year came in at $60bn with the fourth quarter number hitting $22bn, which as we said before represents growth of 265% over the fourth quarter last year. According to Bloomberg, expectations are for revenue to hit $109bn for the 2025 financial year, which represents growth of 82%. Hitting these expectations would put the P/E multiple on 36x. Where is this explosive revenue growth coming from? Is it growing to the sky? Where is the capacity coming from?
Nvidia don’t do much of the GPU manufacturing themselves, so capacity constraints would be more on their supplier side. The huge jump in sales is a function of demand which can be seen in the capex spend of Amazon, Microsoft, Meta and Alphabet, and in the product demanded. Due to the AI boom, they are selling many more high-end GPUs for data centres, which are significantly more expensive compared to consumer grade equipment. The most popular item is the Hopper H100 which is over $30,000 per unit and they sold over half a million of them in 2024. Consensus numbers have revenue growing a more ‘normalised’ 20% after 2025, but there is no real comparable product. This means prices stay high and they sell as many as they can produce. To make things a little more interesting: what if they come out with a newer and more powerful model and we start this demand cycle all over again? What is the revenue upside? You can see how this becomes hard to call, but analysts are erring on the side of optimism with the majority call on the stock being a "buy” and a target price as high as $1,400.
But companies are not going to cover the countryside in data centres, and at some point, they should have most of the GPU’s they need. Yes, there will be some more growth, and maintenance and replacement, but what happens to revenue if this explosive demand becomes largely satisfied? What happened to Icarus after he flew too close to the sun?