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

Morningstar Key Stats for Nvidia

• Morningstar Rating: 3 stars
• Fair Value Estimate: $1,050.00
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Very High

What We Thought of Nvidia’s Earnings

It was yet another quarter of outstanding results for Nvidia, as the company exceeded its fiscal first-quarter guidance while providing investors with a fiscal second-quarter outlook ahead of FactSet consensus estimates. Calendar-year 2024 (most of fiscal-year 2025) looks to be another exceptional year for AI accelerator chip demand, but the biggest news, in our opinion, is management’s bullishness into calendar-year 2025 as well, once the company’s new Blackwell GPUs and clusters hit the market. The unstoppable near-term demand and outlook for next year was the main driver of our fair value increase to $1,050 from $910.

For bullish investors, there were still no signs of AI demand slowing down. Headwinds from China restrictions have come and gone, while spending at the large cloud customers continues to rise. Nvidia also touted close relationships and hefty sales into Meta Platforms META and Tesla TSLA as well.

We’ll be a broken record, but our fair value estimate might be conservative still if the company can deliver its customers with outstanding performance with its next-generation Blackwell products. AI spending from the hyperscalers (Amazon.com AMZN, Microsoft MSFT, Google GOOGL, Meta Platforms) shows no signs of slowing down, and as long as they keep investing in Nvidia’s GPUs for AI workloads, there’s still potential upside in the stock. We think it’s unlikely that GPU demand has plateaued at recent levels.

Fair Value Estimate for Nvidia Stock

Our fair value estimate is $1,050 per share, which implies an equity value of roughly $2.5 trillion. Our fair value estimate implies a fiscal-year 2025 (ending January 2025, or effectively calendar-year 2024) price/adjusted earnings multiple of 37 times and a fiscal-year 2026 forward price/adjusted earnings multiple of 27 times.

Our fair value estimate, and Nvidia’s stock price, will be driven by its prospects in the data center and AI GPUs, for better or worse. Nvidia’s DC business has achieved exponential growth already, rising from $3 billion in fiscal-year 2020 to $15 billion in fiscal-year 2023 and more than tripling thereafter to $47.5 billion in fiscal-year 2024. DC revenue appears to be supply constrained, and we think that Nvidia will continue to steadily boost revenue in each of the four quarters in fiscal-year 2025 as more supply comes online. Based on Nvidia’s strong forecast start to fiscal-year 2025, we model DC revenue rising 133% to $111 billion in fiscal-year 2025. We model a 23% compound annual growth rate for the three years thereafter, as we anticipate strong growth in capital expenditures in data centers at leading enterprise and cloud computing customers. We think it is reasonable that Nvidia may face an inventory correction or a pause in AI demand at some point in the medium term thereafter. Excluding this one-year blip that we model, we anticipate average annual DC growth of 10% thereafter and consider this to be a reasonable long-term growth rate as AI matures.

Read more about Nvidia’s fair value estimate.

Morningstar 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, Advanced Micro Devices AMD.

Read more about Nvidia’s economic moat.

Financial Strength

Nvidia is in outstanding financial health. As of April 2024, the company held $31.4 billion in cash and investments, as compared with $9.7 billion in short-term and long-term debt. Semiconductor firms tend to hold large cash balances to help them navigate the cycles of the chip industry. During downturns, this provides them with a cushion and flexibility to continue investing in research and development, which is necessary to maintain their competitive and technology positions. Nvidia’s dividend is virtually immaterial relative to its financial health and forward prospects, and most of the firm’s distribution to shareholders comes in the form of stock buybacks.

Read more about Nvidia’s financial strength.

Risk and Uncertainty

We assign Nvidia a Morningstar Uncertainty Rating of Very High. The firm is an industry leader in GPUs used in training AI models, and it has 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 has expanded into crypto mining, AI, and perhaps future applications, too.
• 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.

Compiled by Tom Lauricella.