NVIDIA Corporation (NVDA), the semiconductor giant, exhibited exceptional performance throughout the year. The company experienced substantial top-line growth in its last reported quarter, primarily propelled by the escalating demand for NVDA’s computer chips, which is an essential component for driving Artificial Intelligence (AI) systems.

With the impending release of its third-quarter results on November 21, 2023, the question arises: can NVDA sustain its remarkable momentum? Let’s understand in detail.

Boasting a market cap of $1.22 trillion, NVDA is one of the biggest winners of the AI frenzy. The company strategically positioned itself at the forefront of the AI wave by actively engaging in a series of collaborative efforts with a myriad of companies.

By fostering partnerships across diverse industries, NVDA not only enhanced its market presence but also contributed to the evolution and application of AI in various sectors.

For instance, on October 17, NVDA disclosed its collaboration with Foxconn, aimed at expediting the AI industrial revolution. By leveraging this collaboration, Foxconn will integrate NVDA technology into new data centers, focusing on applications such as digitizing manufacturing workflows, developing AI-powered electric vehicle and robotics platforms, and expanding language-based generative AI services.

While the company’s outlook seems favorable, the broader industry landscape may not be as optimistic, potentially impacting NVDA’s long-term prospects. As reported by the Semiconductor Industry Association (SIA), global semiconductor sales experienced a modest 1.9% increase in September 2023 compared to August 2023 but saw a notable 4.5% decline compared to September 2022.

In terms of price performance, the company’s shares have surged 237.3% year-to-date and 63.4% over the past six months to close the last trading session at $492.98.

Here are the factors that could affect NVDA’s performance in the near term:

Robust Financials

For the fiscal second quarter that ended July 30, 2023, NVDA’s revenue increased significantly from its prior-year quarter to $13.51 billion, while its gross profit rose 224.5% from the year-ago value to $9.46 billion. In addition, the company’s net income soared significantly year-over-year to $6.19 billion and $2.48 per share, respectively.

Solid Historical Growth

NVDA’s revenue grew at CAGRs of 35.6% and 22.4% over the past three and five years, respectively. Furthermore, the company’s net income improved at a 44.9% CAGR over the past three years, while its EPS and levered FCF for the same period increased at CAGRs of 44.8% and 39.7%, respectively.

Stretched Valuation

In terms of forward non-GAAP P/E, NVDA is trading at 44.96x, 101.4% higher than the industry average of 22.33x. Its forward EV/EBITDA multiple of 43.20 is 202.6% higher than the industry average of 14.28. Furthermore, its forward EV/Sales ratio of 97.96x is 756.6% higher than the industry average of 2.60x.

Favorable Analyst Estimates

The consensus revenue estimate of $16.11 billion for the fiscal third quarter ended October 2023 reflects a 171.6% rise year-over-year. The consensus EPS estimate of $3.39 for the same period indicates a significant year-over-year improvement.

Moreover, the company surpassed its revenue estimates in each of the trailing four quarters and EPS estimates in three of the trailing four quarters.  

POWR Ratings Reflect Uncertainty

NVDA’s fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, translating to Neutral in our proprietary rating system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. NVDA has an A grade for Growth and Sentiment consistent with its solid historical growth and favorable analyst estimates.

On the other hand, the stock has an F grade for Value justified by its higher-than-industry valuation and a D grade for Stability in sync with its 24-month beta of 1.95.

Within the Semiconductor & Wireless Chip industry, NVDA is ranked #26 out of the 91 stocks.

Beyond what we’ve stated above, we have also rated the stock for Momentum and Quality.  Get all ratings of NVDA here.

Bottom Line

NVDA emerges as a compelling player in the semiconductor realm, poised for continued success with its strategic focus on AI and innovative collaborations. However, given its valuation exceeding industry norms and a broad slowdown in chip sales compared to last year, investors may find it prudent to observe this stock closely for a more opportune entry point.

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

While NVDA has an overall grade of C, equating to a Neutral rating, you may also check out these other stocks within the Semiconductor & Wireless Chip industry: ChipMOS TECHNOLOGIES INC. (IMOS), Everspin Technologies, Inc. (MRAM), and STMicroelectronics N.V. (STM), with an A (Strong Buy) and B (Buy) ratings. For exploring more Semiconductor & Wireless Chip stocks, click here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

NVDA shares were trading at $497.56 per share on Monday morning, up $4.58 (+0.93%). Year-to-date, NVDA has gained 240.59%, versus a 19.49% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Mukherjee

Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run. More...

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