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

With data centres dominating revenue, here’s what we think of Nvidia’s stock

Brian Colello, CPA 15 February, 2024 | 11:13AM
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Nvidia (NVDA) is set to release its fourth-quarter earnings report on February 21, after the market close. Here’s Morningstar’s take on what to look for in Nvidia’s earnings and stock. 

What to Watch for in Nvidia’s Q4 Earnings 

The Data Centre Segment Remains in Focus 

This business dominates Nvidia’s revenue, earnings, and valuation. The company has continued to smash through its prior guidance and lift its estimates for the coming quarter. We anticipate more of the same. 

The biggest factors putting a ceiling on Nvidia’s earnings are supply constraints, and we’ll be interested in any commentary about whether (or how rapidly) the firm’s manufacturing partners are expanding to satisfy demand for its AI graphics processing units. 

Artificial Intelligence Will be Top of Mind 

We see many moving pieces within the AI market for Nvidia and its peers. Some questions we have: 

What impact have US restrictions on AI accelerator sales into China had? What progress has Nvidia made in ensuring its new products are compliant? In the meantime, will the restrictions make a dent in the firm’s growth trajectory? 

What is the demand from nation-states? It appears sovereign governments are buying Nvidia GPUs to build supercomputers. How much will this contribute to revenue growth? 

What is the size of the AI accelerator market? Advanced Micro Devices (AMD) stunningly lifted its forecast for the 2027 industry total addressable market to $400 billion from $150 billion. This includes other types of chips besides GPUs but still implies massive GPU growth, and Nvidia still dominates the AI GPU space. 

What capital expenditure is Nvidia seeing in the data centre? Mega-cap tech companies have lifted their spending plans for AI in 2024, and cloud leaders might buy many more GPUs than what the market anticipates over the next few years. 

Reuters recently reported that Nvidia is building a custom chip design unit that might help build specialized AI chips for others. We’ll be interested in any insight around this initiative, and the opportunities it might open for Nvidia. 

All these items will help us inform our estimates for future data centre revenue growth, and in turn free cash flow generation and our fair value estimate. 

Key Morningstar Metrics for Nvidia 

• Fair Value Estimate: $480.00 
• Morningstar Rating: 2 stars 
• Morningstar Economic Moat Rating: Wide 
• Morningstar Uncertainty Rating: Very High 

Fair Value Estimate for Nvidia 

With its 2-star rating, we believe Nvidia’s stock is overvalued compared with our long-term fair value estimate of $480 per share, which implies an equity value of over $1.1 trillion, a fiscal 2024 price/adjusted earnings multiple of 45 times, and a fiscal 2025 forward price/adjusted earnings multiple of 31 times. 

Our fair value estimate (and Nvidia’s stock price) will be driven by its prospects in the data centre segment and AI GPUs, for better or worse. We anticipate a massive expansion in the AI processor market in the decade ahead, and we see room for tremendous revenue growth both at Nvidia and for competing solutions from either external chipmakers (like AMD or Intel (INTC) or in-house solutions developed by hyperscalers (such as chips from Alphabet (GOOGL), Amazon (AMZN), or others). 

Nvidia’s data centre business has already achieved exponential growth, rising from $3 billion in fiscal 2020 to $15 billion in fiscal 2023. The firm should see an even higher inflection point in fiscal 2024, as we expect data centre revenue to more than double to $41 billion. We don’t view this spike as coming from frontloaded orders or a buildup of excess capacity, as we model 46% growth in fiscal 2025 data centre revenue to over $60 billion. We model growth of 23%, 20%, and 13% in the following three years, driving the segment’s revenue to $100 billion in fiscal 2028. We doubt that any enterprise wants to be left behind, nor does any cloud computing provider want to be shorthanded when providing AI GPUs to customers. 

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 other future applications. 

Nvidia’s data centre 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 preeminent in AI training software and tools, leading cloud vendors would likely prefer to see greater competition in this space and may shift to alternative open-source tools if they were to arise. 

Nvidia’s gaming GPU business has often seen boom-or-bust cycles based on PC demand, and more recently cryptocurrency mining as well. 


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Brian Colello, CPA  is a senior stock analyst with Morningstar.

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