Nvidia: Artificial intelligence will be an integral part of our future lives

Nvidia Corp. has driven the sharp rise and excellent performance of its stock over the past few years due to strong fundamental growth.

According to market forecasts, the AI industry will experience rapid growth, and the healthcare sector is expected to be the biggest beneficiary by 2030.

I think the current valuation of NVDA stock is very appealing because the market already reflects its potential and opportunities for future growth.

At the beginning of January this year, I wrote my first post on Nvidia Corporation (NASDAQ: NVDA) with the title: “Nvidia is still misunderstood by many investors.” In the article, I explained my opinion that artificial intelligence (AI) is not a temporary hype, but an important part of future life, so the valuation of Nvidia stock is very appealing.

Even today, I still think that when someone says that Nvidia's sales multiples are high, that's interesting because the company is profitable, so it's more reasonable to measure it by profit multiples. Ultimately, profit is the key, and Nvidia is now generating significant profits.

If we look at net income and net income ratios, they all clearly indicate a fact. Both are rising rapidly, just like how Nvidia stock has performed over the past few years.

Furthermore, considering market forecasts and Nvidia's position in terms of market position and competitive advantage, I think the future prospects are bright, and expectations will be surpassed, especially with strong business performance in the second half of 2024. Therefore, I believe this week's earnings report (which will be released after the close of trading on Wednesday, May 22) may bring unexpectedly good news.

According to PricewaterhouseCoopers, artificial intelligence could contribute up to $167 billion by 2030. This achievement is mainly due to increased labor productivity and the personalization and cost of artificial intelligence products becoming more affordable over time.

Statista, in partnership with Next Move Strategy Consulting, estimates the AI market will reach around $2 trillion by 2030. Grand View Research expects the market to grow at a compound annual growth rate (CAGR) of around 36% from 2024 to 2030. In particular, Grand View Research notes that significant advances in artificial neural networks, generative adversarial networks, and single-time multi-frame detectors are driving the spread of artificial intelligence.

However, they also pointed out that the high level of regulation may have a significant impact on market development. And they believe the healthcare industry and its sub-sectors, such as robotic surgery, pre-diagnosis, and other automated processes, will be the biggest beneficiaries by 2030.

All three reports agree that the market created by artificial intelligence brings huge opportunities in the future, and we can anticipate high growth rates in the next few years. Moreover, countries around the world have realized this potential: Japan has partnered with Nvidia to build the infrastructure for generative artificial intelligence in the country.

Demand for high-bandwidth memory for Nvidia AI server GPUs remains strong. For example, to meet the growing demand for generative AI, Samsung Electronics (OTCPK: SSNLF) plans to increase the supply of HBM.

SK Hynix is also focusing its production capacity on AI memory, which indicates that AI memory will continue to be in high demand, as the company indicated in its announcement. Furthermore, SK Hynix's HBM appears to have been booked until 2025, and it is expected that data centers (Nvidia is the leader in this field) may face competition as SK Hynix will focus on device-side AI applications in the future.

TSM will also be operating at full capacity for the next two years, as Nvidia and Advanced Micro Devices Inc (AMD) need to meet their high demands. Sales from January to March of this year increased 16.5% over the same period last year. This indicates that Nvidia's results are likely to perform well as well.

However, the most encouraging news for AI investors is that TSMC achieved a year-on-year growth rate of 59.6% in April. That means I think Nvidia's April results (although they will be announced later) should also be strong. As a result, I expect Nvidia's performance guidance for the next quarter or full year to be very positive.

It's also worth noting that almost every “Magnificent 7” mentioned Nvidia during its earnings call, highlighting the importance of this company. For example, Google (GOOG) mentioned:

In my opinion, it's important to show shareholders that you have a large number of Nvidia GPUs and let them know that you will be competitive in the future of AI.

According to my research, Nvidia has been mentioned more times than AMD, but to be fair, AMD was also mentioned during earnings calls from major companies. As a result, both companies seem to have strong market positions recognized by other companies.

I've often seen people compare Cisco Systems (CSCO) and the internet bubble to Nvidia, but in my opinion, this comparison doesn't make sense. Prior to the crash, Cisco's price-earnings ratio was nearly 240 times, meaning that much of its earnings were driven by multiplier expansion, while Nvidia's revenue and earnings grew substantially, indicating that its share price increase was driven by fundamentals.

Nvidia's price-earnings ratio has remained relatively stable over the past year, and the current expected price-earnings ratio is 36 times, far lower than Cisco's price-earnings ratio at the time. Also, with other AI companies and their manufacturing capabilities already booked until the end of 2025, I don't expect Nvidia's profits to decline anytime soon. Demand still exceeds supply in some market segments. Given Nvidia's growth and future growth opportunities, as well as the size of the market, the current price-earnings ratio is very reasonable.

Nvidia's return on investment (ROIC) is far higher than other competitors due to its competitive advantage and CUDA moat, and is particularly effective in defending against AMD's competition. Another advantage, in my opinion, is Nvidia's ability to invest more money in R&D, which generally makes Nvidia even more technologically advanced.

Additionally, AMD's R&D resources aren't all focused on artificial intelligence or GPUs, as they also need to invest in CPUs to maintain their advantage over Intel (INTC). As a result, I expect Nvidia to continue leading the way for the foreseeable future, and I expect Nvidia to continue attracting and retaining top talent in the field of artificial intelligence.

In fact, Nvidia's employer ratings on Glassdoor are very high, with 98% of employees endorsing its CEO, and 93% of employees saying they would recommend the company to friends.

Based on the past 12 months (TTM) diluted earnings per share (EPS) of $11.93, we can analyze market pricing through reverse discounted cash flow (DCF).

Compared to the previous analysis, the stock price slightly exceeded the underlying profit because the market currently expects a compound annual growth rate (CAGR) of diluted earnings per share of 20% per year, which is up from 19% per year a few months ago. However, after this week's results are announced, the diluted TTM is likely to be higher, so the pricing amount will change based on market reactions.

Judging from historical data, the historical growth rate is still far higher than the expected 20% per year. Because growth prospects suggest that historical growth rates may be a good indicator for the future.

The 10-year CAGR was 51.69%, and the 5-year CAGR was 48.40%. I expect the future compound annual growth rate to exceed the current forecast of 20%..

I think everyone knows that Nvidia will see strong year-over-year growth because AI is a hot topic right now, and many companies are accelerating in this field. Based on statements on the earnings call and quarterly results of other companies, Nvidia is likely to hand over a satisfactory report card.

But I think guiding expectations will be key because apparently many investors have very high expectations. If you look at people's expectations on social media, some are even unrealistically high. However, I'm convinced Nvidia will hand over strong results, but I also think the best results will appear in the next quarterly report.

Foxconn (OTCPK: FXCOF) NVL72 liquid coolers and Quanta's NVL36 are expected to make up the majority of Nvidia GB200 servers put into production in the second half of 2024. The GB200's market share is expected to reach 70% by 2025, as its water cooling system is expected to reduce electricity consumption, and energy efficiency has always been one of the points of criticism of Nvidia products.

While I think the H100 will have a positive impact on the results of the first quarter of 2024, the biggest impact in the future will probably come from Blackwell, as I think Blackwell is far ahead of the competition.

AMD may currently have some advantages in terms of lower price, power efficiency, and availability, but when it comes to maximum performance, I think Blackwell has the edge. However, I think both Nvidia and AMD have advantages over Intel, and I'm very interested in them. I think the antagonistic mentality between AMD and Nvidia is sometimes counterproductive because I think both will find their respective areas of strength in the future, so they should all succeed in this huge market.

Intel may also find its own niche because it has a lot of support, such as high-NA EUV machines from ASML Holding (ASML), which could be very valuable in the future.

As a result, I think Nvidia has an advantage in future development because of its strong product portfolio, high intellectual barriers, CUDA moat, and focus on artificial intelligence, which should protect their profits very well.

I expect this week's results to be relatively good, but guidance for the rest of the year will exceed analysts' expectations, as there are many drivers of growth in the second half of 2024 and 2025. Additionally, I think the market is still underestimating Nvidia's long-term growth potential, so I think the current valuation is very attractive.

Nvidia is a very high quality company, and I'm sure most people have noticed that its CEO is extremely talented in marketing, and marketing is an important factor in increasing the impact of a strong product. For many people, the quality of the management team is a key factor in achieving long-term success, and I think Nvidia can do a great job at this.