NVDA Stock Forecast: Analyzing the Surge in NVDA Stock

Levi FuThis NVDA Stock Forecast article was written by Levi Fu – Financial Analyst at I Know First.

*Source: EdTech Stanford University School of Medicine’s

Highlights

  • According to the FY24Q4 earnings report, Nvidia’s revenue was 26.04 billion, showing a YoY increase of 262% and a QoQ increase of 18%, above the Bloomberg consensus of US 24.69 billion.
  • Demand for the Nvidia HGX platform based upon the H100 is strong, continuously driving the growing momentum of the data center8 segment.
  • NVIDIA’s announcement of a 10-for-1 stock split and 150% dividend increase, coupled with strong earnings, raised its share price to USD 1,007 during after-hours trading on the day of earning release.
  • DCF estimates NVDA stock around $1253, a 14% upside potential for the upcoming year of 2024.

Overview

Founded in 1993 and based in Santa Clara, California, NVIDIA Corporation’s main revenue streams come from the US, Taiwan, China, and Hong Kong. It operates through two segments: Compute & Networking and Graphics. The Compute & Networking segment includes data center computing, networking platforms, automated driving, robotics, AI software, and cloud services. The Graphics segment provides GeForce GPUs for gaming and PCs, GeForce NOW streaming, workstation graphics, virtual GPU software, automotive infotainment, and Omniverse software for metaverse applications.

Capstone for the future AI revolution

In terms of revenue in 1QFY25, the computing segment reached $19.4 billion of revenue (a 478% increase yoy). The primary contributing factor is rising demand for computing power, led by AI and ML markets. Meta’s LIama3 is built on 24k H100 GPUs, and OpenAI’s GPT-4o is powered by H200. The network segment revenue reached $3.2 billion (242% yoy), primarily driven by infiniband. NVIDIA’s data center revenue in total marked up to $22,563 million, with TechTitans’ substantial input in AI infrastructure contributing 45% of data center revenue in 1QFY25.

*Source: CFRA report
(Figure 1: Total revenue/EPS estimation)

The graphic segment has reached $4.2 billion, marking a 100% increase compared to FY23Q4 and almost reaching the high point of $4.6 billion in FY21Q1. I anticipate the revenue of the graphic segment will surpass the previous peak in FY21Q1, driven by the recovery from the chip shortage, the mitigation of overstocked GPUs from retailers, and strong pricing power in the gaming industry.

(Figure 2: Revenue of NVIDIA and its growth rate by segments)

There’s been a notable trend of decreasing COGS and increasing gross profit margin over the last 8 quarters. COGS as a percentage of revenue has declined from 56.5% in FY22Q2 to 24.0% in FY24Q4. This indicated that NVIDIA not only has an increasing amount of pricing power in the compute & networking segment over the last 2 years but has gradually formed the economics of scale in production. The decrease in COGS has directly contributed to the expansion of gross profit margins over the past two years, particularly from FY23Q1 onwards. The margin increased from 43.5% in Q2 FY2023 to an impressive 76% in Q4 FY2024. In a peer comparison analysis, Nivida’s current gross margin ranks as one of the highest firms in the semiconductor industry.

(Figure 3: Gross margin with its growth rate and COGS margin of NVIDIA by quarter)
(Figure 4: Net income margin and EPS trajectory)

Future market dominance

As previously noted, the rise in Nvidia’s stock price can be attributed to two key factors: robust market demand and Nvidia’s increasing pricing power, which is bolstered by its strong competitive advantages, particularly in technological innovation. Consequently, analyzing these competitive advantages is crucial to forecasting future stock prices. Jensen Huang, the CEO of NVIDIA, has spoken about the latest trends in AI and NVIDIA’s future outlook. Given that Nvidia operates in two primary segments: Graphics and Compute & Networking, it is essential to discuss the influence of these factors on both segments to fully comprehend the impacts of these catalysts on Nvidia’s future market dominance.

Compute & networking

The AI market is experiencing rapid growth across various sectors, including data centers, automotive, robotics, and healthcare. Specifically, AI in healthcare is projected to grow from 32.3 billion in 2024 to 208.2 billion by 2030, reflecting an annual growth rate of 36.4%. Additionally, data centers and AI servers are expected to see an annual growth rate of 7.8% and 18% respectively, until 2032, according to Grandviewresearch, highlighting the significant market potential for Nvidia’s recent products and initiatives announced at GTC 2024. These announcements demonstrate Nvidia’s continued leadership in AI, data centers, Autonomous driving, Humanoid robotics, and health care.

*Source: Medium

According to an April 2024 report by Digitimes, lead times for NVIDIA’s H100 have decreased from one year to 20 weeks due to easing supply constraints. NVIDIA addressed market concerns about revenue growth slowing with the transition from Hopper to Blackwell, highlighting strong demand for Hopper. The company anticipates Blackwell deliveries to start in Q2 FY25, ramp up production in Q3 FY25, and significantly contribute to earnings for the full year FY25.

Graphics segment

The gaming industry continues to grow. According to Mordor Intel, the graphics GPU market is projected to grow from 3.65 billion to 15.7 billion (2024–29), a 33.84% annual growth rate, which is driven by the increasing adoption of virtual worlds and the rising trend of gamification. As Jensen pointed out during the GTC 2024 conference, the growth is driven by the increasing popularity of esports and virtual reality. As more gamers demand realistic experiences, demand for powerful and efficient GPUs will continue to rise. Noticeable products include GeForce Now and Reflex.

*Source: jurvetson
(Jen-Hsun Huang, CEO of NVIDIA)

Chip ban on China

In the third quarter of FY2023, Nvidia encountered significant geopolitical challenges stemming from new U.S. government license requirements. These restrictions limit exports to China of its A100 and H100 integrated circuits, DGX systems, or any systems incorporating these specific circuits. The requirement also restricts future Nvidia circuits with performance superior to the A100, along with associated systems or boards. Nvidia is forced to relocate certain operations out of China, which means substantial delay in productions and decreasing number in sales.

Despite these challenges, Nvidia has actively engaged with its Chinese customers to fulfill their needs through alternative products, such as the downgraded H20 chip for training AI. In addition, Nvidia produces L20 and L2, two other chips that could comply with the restriction. For the revenue side, it should be noticed that while revenue in China has cut in half, revenue in the US has grown 50% during the fourth quarter, which effectively filled the gap in US.

* Source: ITHome
(NVIDIA HGX H20,L20,L2 Specs)

DCF Valuation

The DCF model suggests an equity value per share of around $1253. This represents a 14% upside potential from the current price. It is important to note that the accuracy of the DCF model relies on the assumptions we make, particularly:

  • The beta of 2.2 is calculated based on the LTM price compared to the S&P 500 of the same time horizon
  • The risk-free rate of 4.48% is based on the US treasury’s 10-year spot rate
  • The market risk premium of 4.15% is calculated using the industrial average
  • The tax rate is calculated based on the Q1 FY25 income statement
  • The cost of debt is calculated based on the Q1 FY25 income statement
  • The terminal growth rate is assumed to be the average US GDP growth
(Figure 6: DCF valuation of NVIDIA)
(Figure 7: WACC of NVIDIA)

The market is generally bullish, and most of the analysts hold a buy position for Nvidia, according to Yahoo Finance. The forecasting price range is wide, with the lowest being $478.4 and the highest being $1400.

(Source: Yahoo Finance)

Conclusion

I recommend buying NVDA stock with a DCF target price of $1253, indicating a 14% upside. NVIDIA’s strong numbers and pricing power, along with robust market demand driven by the AI industry, serve as the foundation for high stock prices. The upcoming stock split may also drive up short-term demand in the future.

It is worth paying attention that the stock-picking AI of I Know First has a high signal on the one-year market trend forecasts, supporting my position for the NVDA stock forecast. The light green for the short-term forecasts is mildly bullish, while the darker green is a strong bullish signal for the one-year forecast.

Past Success with NVDA Stock Forecast

I Know First has been bullish on the NVDA stock forecast in the past. On May 31st, 2024 the I Know First algorithm issued a forecast for NVDA stock price and recommended NVDA as one of the best computer stocks to buy. The AI-driven NVDA stock prediction was successful on a 1-year time horizon, resulting in more than 173.32%.

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Please note-for trading decisions use the most recent forecast.