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Nvidia Could Still Have More Room to Run

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There’s no hotter topic in tech these days than artificial intelligence (AI). And when it comes to the proverbial “picks and shovels” enabling the AI gold rush, all roads lead to Nvidia (Nasdaq: NVDA).

The graphics-chip pioneer has reinvented itself as the undisputed leader in accelerated computing, and its cutting-edge software and processors power everything from autonomous vehicles to ChatGPT to drug discovery.

Naturally, that’s sent Nvidia’s stock skyrocketing in recent years. In fact, since the start of 2023, shares have surged more than 500%.

Image: Nvidia (Nasdaq: NVDA) chart

With the stock trading at such sky-high prices, you could be forgiven for thinking the company is too richly valued to be considered a bargain. But the results of our Value Meter analysis might surprise you.

Based on its enterprise value-to-net asset value (EV/NAV) ratio alone, it’s quite clear that Nvidia trades at a lofty premium to the broader market. The company’s EV/NAV of 58 is about nine times richer than the average of 6.4 for companies with positive net assets.

However, there are compelling reasons investors are betting that Nvidia’s growth will continue to significantly outpace the overall market. The company’s latest financial results speak for themselves.

In Q4, Nvidia’s revenue skyrocketed 265% year over year to $22.1 billion, driven by a jaw-dropping 409% increase in data center sales. For the full 2024 fiscal year, which ended in January, revenue more than doubled to $60.9 billion, and the company generated an impressive $26.9 billion in free cash flow.

Chart: Nvidia Maintaining Its Torrid Pace

Over the past four quarters, Nvidia’s free cash flow averaged nearly 22% of its net assets. To put that in perspective, the average among companies with four straight quarters of positive free cash flow (which Nvidia has) is just 8.7%.

In other words, Nvidia is a veritable cash machine compared with most of corporate America.

What’s driving these exceptional results? In a word, innovation.

Nvidia invented the graphics processing unit (GPU) back in 1999. While GPUs were originally designed to power video game graphics, they also happen to be incredibly well suited for the massive computational power required by AI applications. Nvidia recognized this potential early on and has been aggressively tailoring its chips and software to more advanced AI models.

As a result, Nvidia’s data center revenue, driven largely by AI workloads, has exploded from the equivalent of a rounding error to a massive sum of $47.5 billion in fiscal 2024, more than tripling year over year and becoming the largest slice of the company’s revenue.

And Nvidia is just getting started.

Management sees the AI momentum continuing in the near term, guiding for roughly 8.6% sequential revenue growth in Q1. CEO Jensen Huang believes the ongoing shift from general-purpose processors to Nvidia’s accelerated computing platform will expand the company’s addressable market by trillions of dollars in the coming years.

(That’s trillions with a “T.”)

Of course, Nvidia does face competition from rivals like Advanced Micro Devices (Nasdaq: AMD) and Intel (Nasdaq: INTC). But the company’s entrenched ecosystem and rapid pace of innovation give it a strong competitive moat.

So while its valuation is certainly rich, the company’s dominant competitive position, explosive growth and robust cash generation suggest it may well grow into its premium price tag. With the AI revolution still in its early innings, the company seems to have ample room to run.

The Value Meter rates Nvidia as “Slightly Undervalued.”

The Value Meter

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