Shares of graphics hardware behemoth Nvidia (NVDA) really excited investors during its 2022 Investor Day presentation, shedding light on a plan to become the first $1 trillion semi company. If there's a company that can pull it off, it's Nvidia, with its brilliant leader Jensen Huang.
Undoubtedly, the total addressable market (TAM) for Nvidia is enormous. The innovative graphics-processing unit (GPU) maker has a front-row seat to video gaming, automotive tech, AI, and data center. Undoubtedly, a nice slice of each of the following markets could propel the company's market cap above the $1 trillion mark.
Still, it's Nvidia's Omniverse initiative that could be the key to unlocking next-level growth over the next decade once we move closer to the concept of the metaverse.
However, although Nvidia is on the cutting edge of next-generation technology, I am neutral on the stock. It's not that I wasn't excited about Nvidia's investor day or the $1 trillion opportunities at hand. It's the valuation of the stock going into a higher-rate environment.
The growth sell-off has been unforgiving thus far, and it may not be over. With a 22.7 times sales multiple, NVDA stock faces tremendous downside risk if the broader growth sell-off continues.
For that reason, I'm in no rush to chase Nvidia stock to trillion-dollar market cap territory. It will come in due time, but it will surely be a rocky road to the level, with the growth trade starting to show its wobbly legs.
Nvidia's Omniverse is the Answer to Meta's Metaverse
Add the exciting Nvidia Omniverse effort into the equation, and the trillion-dollar aspirations are not at all far-fetched. Thanks to a timely name change, Meta Platforms (FB) has propelled the concept of the metaverse to the forefront. In recent months, though, the growth trade has faded, and the metaverse ambitions of Mark Zuckerberg have started to seem more far-fetched.
With interest rates on the rise, profitability matters more than exciting stories. Still, there's no denying the long-term potential in the metaverse. Arguably, Nvidia is one of the better-equipped companies to construct the metaverse, not Meta. Unlike Meta, Nvidia has been in the gaming business for a very long time, with its top-of-the-line hardware that helps gamers run their favorite titles.
Not only does Nvidia's background give its Omniverse offering a greater chance at success, but it also lacks the questionable reputation that Facebook has. Further, early teases of Nvidia's Omniverse appear so much more exciting than the Meta presentation that revealed the firm's new name and focus.
Simply put, Nvidia is a graphics power king, and it's this hardware edge that could allow it to transition consumers into virtual worlds, which will likely be gaming-centric.
Nvidia Stock's Valuation Remains Excessive
Nvidia's Investor Day did not fail to impress this year. In many ways, its presentation is becoming more exciting than the likes of an Apple keynote (at least until the company has a chance to unveil the Apple Car or mixed-reality headset). The initial reaction was profoundly positive. Still, the stock has been shedding some of its recent gains.
At the end of the day, valuation matters. As one of the priciest semi stocks out there, Nvidia stock could be one of the growth stocks to face amplified damage as the rate-driven valuation reset continues.
Further, many industries Nvidia is pushing towards may not be tremendously profitable until many years down the road. Think nascent markets like AI and Omniverse. They're undoubtedly exciting, but it's unclear when next-generation AI and the metaverse will be ready for prime time.
If sizeable profits from such awe-inspiring initiatives are closer to 2030 than 2022, the stock will undoubtedly take a hit, especially now that the Fed has shown signs of increased hawkishness.
Wall Street's Take
Turning to Wall Street, NVDA stock comes in as a Strong Buy. Out of 26 analyst ratings, there are 21 Buy recommendations and five Hold recommendations.
The average Nvidia price target is $351.74, implying an upside of ~44%. Analyst price targets range from a low of $245 per share to a high of $410 per share. (See NVDA stock forecast on TipRanks)
The Bottom Line
Nvidia is such a great company with a visionary founder-led leader. Nvidia's TAM is huge and seems virtually unbounded, but the real risk to the stock at these valuations is what happens with the growth trade.
The company itself will be firing on all cylinders, and I do not doubt that it will deliver. That alone may make the stock worth a hefty premium, but is ~23 times sales too hefty a premium? I'm not so sure.
In any case, I'd take a raincheck on the name because the "growth at any price" trade seems all but done now that the Fed is so focused on inflation.
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Read full Disclaimer & Disclosure
Not shirking from its ambitious plans to dominate the chip space, at its recent annual GTC conference, Nvidia (NVDA) announced that it is putting together the NVIDIA Eos, or as it is more impressively known - the world’s fastest AI supercomputer.
The next-gen, AI-optimized machine’s specs and size are mightily impressive as they are, says Wells Fargo’s Aaron Rakers, who highlights the fact it will probably be used for a plethora of different “AI-optimized workloads.” One use, though, probably more than investors currently realize, according to Rakers.
“We think investors could / should also consider NVIDIA's Eos as playing a significant role in the company's development as an autonomous (software-defined) vehicle platform provider, something we believe is not fully appreciated; consider positioning vs. Tesla's Dojo supercomputer strategy,” said the 5-star analyst.
Basically, Rakers thinks the Eos supercomputer should be perceived as a “foundational” part of NVIDIA’s DRIVE (autonomous/software-defined vehicle) software strategy, with the platform enabling Nvidia to “develop and deliver” AI-created software for the automotive industry.
According to a recent Ericsson report, by 2025, it anticipated that software and the software experience will account for 50% of “vehicle value.” Therefore, it stands to reason, that amongst auto manufacturers, being able to deliver “software-defined” vehicles is a strategic necessity.
And that is why Rakers believes Nvidia - as the creator of the DRIVE software’s capabilities – sees itself as well-positioned to capture a huge chunk of up to 50% of the “economics of the automotive industries drive toward connected subscription services / OTA software functionality.”
The company is already making inroads with the right clientele. So far, Nvidia has signed on the dotted line with a couple of key full stack DRIVE platform customers, which are set to make use of NVIDIA DRIVE Hyperion 8. The agreement with Mercedes-Benz was disclosed in June 2020 with vehicles set to become available in 2024 and Jaguar Land Rover was announced this February with vehicles slated for release in 2025.
All in all, Rakers rates Nvidia shares an Overweight (i.e. Buy) while the $370 price target makes room for ~35% upside in the year ahead. (To watch Rakers’ track record, click here)
Over the past 3 months, 27 analysts have thrown the hat in with NVDA reviews, of which 22 are to Buy and 5 to Hold, all coalescing to a Strong Buy consensus rating. The average target clocks in at $352.71, suggesting shares could climb 29% higher over the one-year timeframe. (See Nvidia stock analysis on TipRanks)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.