Going Into Earnings, Is Nvidia Stock a Buy, a Sell, or Fairly Valued?

Nvidia NVDA is set to release its first-quarter earnings report. Here’s Morningstar’s take on what to look for in Nvidia’s earnings and its outlook for Nvidia stock.

Key Morningstar Metrics for Nvidia

• Fair Value Estimate: $910.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Very High

Earnings Release Date

• Wednesday, May 22, after the close of trading

What to Watch for In Nvidia’s Q1 Earnings

• Nvidia has been steadily beating its quarterly guidance while guiding for the upcoming quarter above FactSet consensus estimates. We anticipate more of the same in its May earnings report.
• Nvidia’s data center business is still the focal point. Supply constraints still seem like the most significant cap on its artificial intelligence chip business. We continue to be interested in any commentary about whether (or how rapidly) Nvidia’s manufacturing partners are expanding to satisfy demand for its AI graphical processing units.
• The rapidly evolving AI market is crucial to the firm’s long-term valuation, but we still have many questions about these markets. What is the pace of data center capital expenditure in 2024 and beyond? Cloud vendors have indicated that they will continue to spend above their prior expectations to invest in AI. We think that much of this spending will go into Nvidia’s pockets. What does capital expenditure look like beyond the mega-cap cloud vendors? Enterprise spending at software vendors, financial services companies, healthcare firms, and the like also appears material.
• What is the size of the AI accelerator market? Advanced Micro Devices AMD stunningly lifted its forecast for the 2027 industry total addressable market to $400 billion from $150 billion. This higher total addressable market includes other types of chips besides GPUs, but it still implies massive GPU growth, and Nvidia still dominates the AI GPU space.
• How is Nvidia thinking about the chip development aspirations of these mega-cap technology customers? How will the firm combat these threats? When will its near-term supply constraints be resolved?

Fair Value Estimate for Nvidia Stock

With its 3-star rating, we believe Nvidia’s stock is fairly valued compared with our long-term fair value estimate of $910 per share, which implies an equity value of roughly $2.2 trillion. Our fair value estimate implies a fiscal 2025 (ending January 2025, or effectively calendar 2024) price/adjusted earnings multiple of 35 times and a fiscal 2026 forward price/adjusted earnings multiple of 26 times.

For better or worse, both our fair value estimate and Nvidia’s stock price will be driven by the company’s prospects in the data center, or DC, and AI GPU businesses. DC has already achieved exponential growth, going from $3 billion in fiscal 2020 to $15 billion in fiscal 2023 and then more than tripling to $47.5 billion in fiscal 2024. DC revenue appears to be constrained by supply, and we think Nvidia will continue to steadily boost revenue in each of the four quarters in fiscal 2025 as more supply comes online. Based on Nvidia’s strong forecast start for fiscal 2025, we model DC revenue rising 113% to $101 billion over the year.

We model a 10% compound annual growth rate for the three years thereafter, as we think it is reasonable that the firm may face an inventory correction or a pause in AI demand at some point in the medium term. We model an average annual DC growth of 10% thereafter, and we consider this a reasonable long-term growth rate as AI matures.

Read more about Nvidia’s fair value estimate.

Economic Moat Rating

We assign Nvidia a wide moat, thanks to intangible assets around its graphics processing units and, increasingly, switching costs around its proprietary software, such as its Cuda platform for AI tools, which lets developers use the firm’s GPUs to build AI models.

Nvidia was an early leader and designer of GPUs, originally developed to offload graphic processing tasks on PCs and gaming consoles. The firm has emerged as the clear market share leader in discrete GPUs (over 80% share, per Mercury Research). We attribute this leadership to intangible assets associated with GPU design, as well as the associated software, frameworks, and tools developers need to work with these GPUs. In our view, recent introductions like ray-tracing technology and the use of AI tensor cores in gaming applications are signs Nvidia has not lost its GPU leadership. A quick scan of GPU pricing in gaming and DC shows the firm’s average selling prices can often be twice as high as its closest competitor, AMD.

Read more about Nvidia’s economic moat.

Financial Strength

Nvidia is in outstanding financial health. As of January 2024, the company held $26.0 billion in cash and investments, compared with $9.7 billion in short-term and long-term debt.

Read more about Nvidia’s financial strength.

Risk and Uncertainty

We assign Nvidia an Uncertainty Rating of Very High. The firm is an industry leader in GPUs used in training AI models, and it’s carved out a good portion of demand for chips used in AI inference workloads (which involves running a model to make a prediction or output). The sky is the limit for the company’s profitability if it can maintain this lead over the next decade. However, any semblance of the successful development of alternatives could meaningfully limit its upside.

Read more about Nvidia’s risk and uncertainty.

NVDA Bulls Say

• Nvidia’s GPUs offer industry-leading parallel processing, which was historically needed in PC gaming applications, but it has expanded into crypto mining, AI, and perhaps future applications.
• Nvidia’s data center GPUs and Cuda software platform have established the company as the dominant vendor for AI model training, which is a use case that should rise exponentially in the years ahead.
• The firm has a first-mover advantage in the autonomous driving market that could lead to widespread adoption of its Drive PX self-driving platform.

NVDA Bears Say

• Nvidia is a leading AI chip vendor today, but other powerful chipmakers and tech titans are focused on in-house chip development.
• Although Cuda is currently a leader in AI training software and tools, leading cloud vendors would likely prefer to see greater competition in this space, and they may shift to any alternative open-source tools that arise.
• Nvidia’s gaming GPU business has often seen boom-or-bust cycles based on PC demand and, more recently, cryptocurrency mining.

This article was compiled by Sokhoeun Noeut.