Nvidia (NASDAQ: NVDA) has seen its stock rise almost 2x this year and 3.5x since the start of 2019. The stock now trades at nearly 60x projected 2021 earnings (Nvidia’s fiscal year ends in January), with 2021 earnings-per-share expected to come in at around $8.00 (vs $4.59 in 2020). Does this make the stock expensive? We do not think so, as revenues could easily grow around 1.7x by 2024, with EPS likely to grow around 2x, taking the stock to $700. Here is how this could play out.
Nvidia’s Revenues could grow by almost 1.7x from projected levels of around $14.65 billion in 2021 to $25 billion by 2024, representing a growth rate of roughly 20% per year (for context annual growth was about 30% between 2016 and 2020). Multiple trends support this continued growth. Firstly, the share of data center revenue in Nvidia’s total revenue has jumped as of Q1 2021 (37% of total revenue vs 28% in Q1 2020). The Nvidia A100 data center GPUs are top-of-the-line data analytics processors, which are used by companies in advanced data analysis and AI applications. Another plus related to this is the rising margins, as the data center business is more profitable than the gaming GPU segment, given the higher selling prices (gross margins came in at 65% in Q1 ’21 vs 58% for the same period last year). Gaming revenues also rose 27% Y-o-y in Q1 ’21, but part of this was due to Covid-19 and the related lockdowns, which forced people to stay home and led to a surge in gaming console and gaming laptop sales. However, in the gaming segment, Nvidia’s GeForce RTX graphics processor has been gaining traction and the company claims it could give Sony and Microsoft a run for their money, by making RTX-powered notebooks the most powerful gaming consoles in the world. Whether that happens or not, RTX is one of the top notebook graphics processors in the market and RTX-powered devices are bound to witness a surge in sales.
Going forward, we expect the share of data center sales in Nvidia’s total revenue to keep rising, and with it, Nvidia’s margins are also set to rise. The combined effect of growing revenues and rising margins could see Nvidia’s 1.7x revenue growth by 2024 translate into a roughly 2x growth in EPS. Net margins came in at 31% in 2018 and 35% in 2019, but the semiconductor supply glut hurt Nvidia in 2020, dragging margins to 26%. Projected margins for 2021 stand at around 33%. Further, Nvidia is already dominating the gaming processor market, and this combined with its strong data center revenue growth could help drive margins to around 40% by 2024. We expect $25 billion in revenues combined with 40% net margins to translate into a net income of around $10 billion in 2024.
Now if Nvidia’s Revenues grow 1.7x and EPS grows 2x, the forward P/E multiple will shrink to 0.5x its current level, assuming the stock price stays the same, correct? But that’s what Nvidia investors are betting will not happen! If EPS expands 2x over the next few years, instead of the P/E shrinking from around 60x presently to about 30x, a scenario where the P/E metric falls more modestly, perhaps to about 45x looks more likely. For context, Nvidia’s closest competitor AMD currently trades at a 75x forward multiple. One might assume that Nvidia’s multiple will remain lower than AMD’s, but significantly higher than the more mature competitor Intel (which currently trades at a forward P/E of 10x). This would make growth in Nvidia’s stock price by about 50% a real possibility by the end of 2023, taking it to $700.
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