Nvidia will have one red flag and one green flag in 2023.
Two years ago, the selling of graphics processing units (GPUs) to gamers—who use the chips to build powerful gaming PCs—was Nvidia’s (NVDA -0.98%) main source of income.
However, since ChatGPT’s OpenAI launched in November, a lot has happened for the company. Due to its over 85% market dominance in GPUs, the tech giant gained an advantage in artificial intelligence (AI) and eventually became the main chip provider for numerous businesses.
Because of this, Nvidia’s stock has soared by almost 230% year to date, coupled with revenue that is increasing at an unprecedented rate every quarter. The business is expanding rapidly and most likely has a lot to offer investors in the long run. However, in comparison to other AI-focused startups, its stock has become more costly due to its rapid ascent.
Thus, before you start piling up Nvidia stock, let me provide one positive and one negative prediction for the chipmaker for 2023.
Green flag: Consistently growing stars that don’t appear to be slowing down
Last Monday, Nvidia released its third-quarter 2024 earnings, which concluded on October 29. The company surpassed analyst forecasts by almost $2 billion and reported sales increase of 206% year over year. Operating income increased by more than 1,600%, mostly due to the company’s data centre operations. Nvidia’s data centre business expanded 279% as a result of higher processor sales.
Macroeconomic challenges, meanwhile, seem to be abating as the company’s gaming division reported an 81% increase in sales.
Every aspect of Nvidia’s operations is growing at a promising rate. Remarkably, even gross margins are increasing: in Q3 2024, they reached 74%, 20 percentage points more than the same indicator the previous year.
Next year, Nvidia will have more competition as new products from Advanced Micro Devices and other chip manufacturers are released. But according to Srini Pajjuri, managing director of Raymond James, “GPU demand continues to outpace supply as Gen AI adoption broadens across industry verticals,” as of last week.
Pajjuri is not “overly concerned” about Nvidia’s performance in 2024 and thinks the company will maintain its over-85% market dominance in AI.
Rivals will have a difficult time challenging the company’s dominance because Nvidia is expected to benefit greatly from AI for many years to come.
Warning sign: AI stocks are less expensive than Nvidia
The quick ascent of Nvidia stock has paid off for existing investors, but it has also driven up the price of its shares for potential buyers. Over the coming year, the company’s finances will probably continue to grow, but a large portion of that expansion may already be factored into the share price.
Nvidia’s stock has actually dropped by roughly 5% since its earnings announcement, despite the company releasing record-breaking Q3 2024 figures this month. This is because Wall Street is still dubious about the company’s ability to grow over the coming year. Thus, it could be advisable for individuals who are interested in investing in AI to look at less expensive choices for the time being.
The price-to-earnings ratios (P/E) and price-to-free cash flows of some of the largest brands in artificial intelligence (AI), such as Nvidia, Amazon, Microsoft, and Alphabet, are contrasted in the above graphic. These are helpful metrics for estimating the value of stocks; lower numbers represent better deals.
Alphabet is by far the best value according to both measures, with Microsoft coming in second place. Compared to Nvidia, these businesses have comparable long-term earnings potential in AI, and their strong brands present a plethora of opportunities for monetizing their AI products.
With the power of AI, Nvidia’s stock has increased by more than 1,000% in the last five years, and it’s impossible to predict how much more it could grow in the next five years. To guarantee substantial returns, however, potential investors need a budget to retain the chipmaker’s stock for at least ten years.
If you want to wait for Nvidia’s stock to drop to a more appealing price, you could also consider investing in AI now through Alphabet or Microsoft.
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