Riding the AI Wave: Why Nvidia continues to be a Top Buy

NNicholas November 27, 2023 5:47 PM

Nvidia, the tech giant leading the artificial intelligence (AI) boom, continues to display exceptional operational performance. This is attributed to its success in advanced AI chip production and sales, maintaining a dominating market share. Despite growing competition, the company’s swift innovation cycle and strong financial results make it a compelling investment.

Impressive third-quarter earnings

Nvidia's operational momentum is firmly reflected in its latest third-quarter earnings. The company saw a whopping 206% increase in revenue to achieve a record of $18.12 billion. This surge in revenue is mainly credited to the company's data center business, which witnessed a significant 279% growth to $14.51 billion. The sale of advanced graphics processing units like the A100 and its successor, the H100, has been a primary driver for this growth.

Nvidia's continued success lies in its relentless pursuit of technical innovation. It recently announced its new HGX H200 to make AI computing even faster. An impressive recovery was also seen in Nvidia's gaming sector, with a sales jump of 81% year over year to $2.86 billion. This resurgence suggests a potential bounce back from macroeconomic hurdles such as inflation and high interest rates, indicating more growth for Nvidia on the horizon.

Navigating through rising competition

In the face of mounting competition, Nvidia isn’t standing down. Companies like AMD, Amazon, and Tesla have begun developing their own data center chips. AMD, in particular, poses a significant threat as it aims to sell its AI chips to multiple companies. However, Nvidia’s swift update cycle and early market arrival with full-scale production of the H100 chip give it a competitive edge, allowing it to retain its market lead.

Assessing Nvidia's stock valuation

Despite stellar results, Nvidia's stock saw a 3% dip following the earnings announcement, largely attributed to analysts' concerns of overvaluation. However, this bearish sentiment doesn't consider Nvidia's rapid growth and high net income margin. The use of forward price-to-earnings rather than the price-to-sales metric better captures Nvidia's growth prospects. With a forward P/E of 32 compared to the market average of 25, Nvidia's stock remains reasonably valued given its robust growth rate and potential to continue dominating the AI market.

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