Nvidia (NYSE:NVDA) is an American technology corporation that primarily provides GPUs, software platforms, and machine learning products in different industries. Nvidia held its annual GPU Technology Conference (GTC) to introduce its products’ advancement this Monday. With its newly introduced Blackwell GPUs and strong market position, I am led to believe that NVDA stock is undervalued.
Catalyst
Nvidia’s growth is explained by its newly innovative products and expansion into the AI industry. The company developed different advanced GPUs that can solve problems in different industries like data centers, gaming, AI, and automotive.
One of Nvidia’s notable products is the Hopper, which features the H200 Tensor Core GPUs. The Hopper GPU is designed to provide accelerated performance in large-scale AI and high-performance computation. Notably, at the beginning of 2024, Meta (NASDAQ:META) spent $10.5 billion to buy 350,000 Nvidia H100 GPUs to support Meta’s long-term effort to build an artificial general intelligence. In my opinion, this proves how strong Nvidia’s growth is in supporting the intensive AI workloads and high-performance computational.
In its recent GTC conference, Nvidia introduces the new product Blackwell, the successor of the Hopper GPU, offering a stronger and quicker performance. It includes 2 GPUs, the B100 Tensor core and the GB200 “Grace Blackwell” Superchip, specifically designed to support and improve AI models. The Blackwell will allow companies to build bigger and more complex AI models. The global AI market reached $196.63 billion in 2023. The industry is expected to grow at a CAGR of 37.3% and reach $1,811.75 billion in 2030. I believe that Nvidia’s new GPUs can contribute to its strong revenue growth in the next quarters as the demand for AI is growing.
Additionally, through Nvidia’s high net margins of over 50%, I believe the company can rapidly facilitate its cash flow to quickly adapt and lead in the industry’s newest advancement.
Valuation
Nvidia’s quarterly revenue for January 2024 is up 265% YoY, demonstrating the company’s rising customer demand. I forecasted the revenue growth rate for Nvidia in FY2025 to be 70%, based on its new introduction of the Blackwell GPU and possibly increased demand for it. I believe that Nvidia can achieve this revenue growth because its market share in GPUs of 18% could increase further with an expansion into the AI industry. Especially provided the fact that within the discrete graphics cards, which are mainly used for gaming, high-demanding applications, and graphic works, Nvidia is dominant with a market share of up to 83%.
And, if the company can continue to do a good job in handling its operations, I expect the margins can increase to an average of 65% in the future years.
The WACC is calculated to be 12.26% based on the beta of 1.3, the cost of equity is 12.34% and the cost of debt is 2.25%. I then discounted the free cash flow based on the 12.26% WACC and the terminal growth rate of 10%. Based on the model, the company’s equity value per share could reach $1,168.65. There is a potential upside of 30.7%.
Risk
Despite the strong growth in the previous quarter, Nvidia’s business has some risks with it. Because NVDA stock is a global company, it can not resist the problem in its business. Specifically, the tension in trade between the United States government and the Chinese government has impacted Nvidia’s markets. In late 2023, as the United States government restricted exports of advanced AI chips into the Chinese market, Nvidia’s revenue fell short. The company solves the problem by producing a “lower” version of chips to export to China. However, this is just a short-term solution as the trade restrictions are still there
Moreover, NVDA stock imports a lot of its GPU materials internationally, relying on a global supply chain. Any disruption in the supply chain including geopolitical tensions or trade disputes can impact Nvidia’s ability to produce and deliver its products to meet customers’ requirements. I think that the geopolitical tension and supply chain disruption could be a risk that impacts Nvidia’s revenue growth in the future.
Conclusion
In conclusion, with Nvidia’s expansion in market share, the future growth of the AI industry, and its customers being mostly large companies, I believe that Nvidia’s stock still has room for growth.
On the date of publication, Michael Que did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
The researchers contributing to this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.