Where Will Nvidia Stock Be In 5 Years? (NASDAQ:NVDA)

Graphics Chip Maker Nvidia Reports Quarterly Earnings

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Elevator Pitch

I rate NVIDIA Corporation’s (NASDAQ:NVDA) shares as a Hold. My previous December 21, 2021 article focused on NVDA’s 2022 outlook; this latest update discusses NVIDIA Corporation’s five-year outlook in view of the company’s recently concluded Investor Day 2022.

In five years’ time, NVIDIA Corporation’s top line could expand to close to $70 billion based on sell-side consensus estimates implying a CAGR of +21%. This looks to be achievable, as NVDA’s forecasted FY 2027 (YE January) revenue will still be only less than 7% of the company’s Total Addressable Market or TAM. Despite a decent medium term growth outlook, NVDA stays as a Hold, as I deem its forward FY 2024 P/E multiple of 41.6 times to be fair.

NVDA Stock Key Metrics

NVDA’s shares didn’t perform well post-results announcement, despite delivering better-than-expected revenue and earnings for Q4 FY 2022. As such, it is important to evaluate the company’s key metrics in greater detail.

NVIDIA Corporation issued the company’s Q4 FY 2022 results press release on February 16, 2022 after the market closed. The company’s revenue jumped by +53% YoY to $7,643 million in the fourth quarter of the prior fiscal year and exceeded the sell-side’s consensus sales estimate by +3%. NVIDIA Corporation’s non-GAAP adjusted earnings per share surged by +69% YoY to $1.32, which was +8% higher than what Wall Street had anticipated previously.

Notwithstanding above-expectations financial results, NVDA’s stock price subsequently decreased by -8% from $265.11 as of February 16, 2022 to $245.07 at the close of the February 17, 2022 trading day. A February 17, 2022 Seeking Alpha News article had highlighted that “semiconductor stocks largely sold off” on February 17, 2022 due to “worries over escalating tensions between Russia and Ukraine.” This is one of the factors contributing to NVIDIA Corporation’s share price weakness post-results announcement.

Another key factor is that the recent quarterly results revealed some weak spots for NVDA as evidenced by certain key metrics.

NVIDIA Corporation’s non-GAAP adjusted gross profit margin was flat QoQ at 67.0% in Q4 FY 2022, and the company had guided for its non-GAAP gross profit margin to be in the 66.5% to 67.5% range for Q1 FY 2023. The mid-point (67.0%) of NVDA’s gross margin guidance implies that it is likely that NVIDIA Corporation could have two consecutive quarters (Q4 FY 2022 and Q1 FY 2023) without gross margin expansion. NVDA did not provide reasons for the flattish gross profit margin guidance, but it is probable that rising costs and a less favorable revenue mix could have put a cap on its gross margin expansion.

Separately, NVDA’s automotive business didn’t do well in the most recent quarter. The company’s automotive revenue contracted by -7% QoQ and -14% YoY to $125 million in Q4 FY 2022. Its automotive business also saw its top line decrease by -11% QoQ and -1% QoQ in Q4 FY 2022 and Q3 FY 2022, respectively.

On the positive side of things, this negative QoQ revenue growth trend for NVDA’s automotive business could reverse going forward. At the company’s Q4 FY 2022 earnings call, NVIDIA Corporation guided that its automotive business should see a “return to sequential revenue growth in Q1 (FY 2023) with more meaningful inflection in” 2H FY 2023. The medium term outlook for NVDA’s automotive business is also positive, with the company announcing on February 16, 2022 that “all new Jaguar and Land Rover vehicles will be built on the NVIDIA DRIVE™ software-defined platform” beginning in 2025 as part of a new partnership.

NVDA last traded at $281.50 as of March 24, 2022 which is significantly higher than the company’s post-results share price of $245.07. This suggests that the market is looking beyond NVIDIA Corporation’s fourth-quarter results and focusing on its intermediate to long term outlook.

Is Nvidia At A Fair Value?

NVIDIA Corporation is at a fair value based on my analysis.

NVDA currently trades at 41.6 times consensus forward two fiscal years (FY 2024) normalized P/E as per S&P Capital IQ data and based on its last traded stock price of $281.50 as of March 24, 2022. This is just slightly lower than NVIDIA Corporation’s historical three-year mean forward P/E multiple of 42.6 times.

Also, NVIDIA Corporation’s forward FY 2024 normalized P/E multiple of 41.6 times is largely aligned with its historical earnings per share growth and ROE. According to S&P Capital IQ data, NVDA’s FY 2022 ROE was around 45%, while its normalized earnings per share CAGR for the FY 2018-2022 period was approximately +42%.

In the subsequent two sections of the article, I touch on NVIDIA Corporation’s growth outlook in the near-term and intermediate term, respectively.

Is Nvidia Expected To Grow?

NVIDIA Corporation is expected to still grow strongly in the very near-term.

In its Q4 FY 2022 results press release issued in mid-February 2022, NVDA highlighted that it sees the company achieving revenue of $8.1 billion (implying +43% YoY growth) and non-GAAP adjusted gross profit margin of 67.0% (as mentioned earlier) for Q1 FY 2023 based on the mid-point of its guidance. This is consistent with the market consensus’ (source: S&P Capital IQ) top line expansion of +43% YoY for Q1 FY 2023. The sell-side analysts forecast that NVIDIA Corporation’s normalized earnings per share will grow by +41% YoY in the first quarter of fiscal 2023 after taking into account NVDA’s management guidance.

At the company’s Investor Day 2022 held on March 22, 2022, NVIDIA Corporation stressed that “our (Q1 FY 2023) guidance was quite solid” and emphasized that there is “no change” to its management guidance as it stands now. In other words, NVDA is still expected to deliver robust top line and bottom line growth in Q1 FY 2023 as it previously guided, and revenue or earnings misses for the next quarterly results announcement are much less likely.

I focus on NVDA’s five-year outlook in the next section.

Where Will Nvidia Stock Be In 5 Years?

NVIDIA Corporation gave some indications of where the company could be in a few years’ time at its recent Investor Day.

Firstly, NVDA expects that the number of cloud gaming users worldwide could potentially grow to 100 million in 2024. As a comparison, Newzoo had earlier forecasted last year global cloud gaming users are expected to rise to 23.7 million by the end of 2021. This is one of the key factors supporting NVIDIA Corporation’s estimation of a $100 billion Total Addressable Market or TAM for its gaming business. NVDA’s FY 2022 gaming revenue of $12.5 billion is only 12.5% of its gaming TAM.

Secondly, NVIDIA Corporation mentioned at its 2022 Investor Day that third-parties’ forecasts suggest that the “cloud server market installed base” could increase from “20 million servers” as it stands now to “35 million by 2025” for which Artificial Intelligence is a key driver. NVDA also emphasized at the recent Investor Day that “we have created more AI software than anyone” which translates into a substantial “business opportunity” for “both hardware and software.” These provide justification for NVIDIA Corporation’s assumption that the TAMs for both its software and chips & systems businesses will be as large as $300 billion.

Thirdly, NVDA also guided for a $300 billion TAM for its automotive business at its March 2022 Investor Day. This is validated by the significant +38% increase in the company’s six-year automotive pipeline from $8 billion for FY 2022-2028 to $11 billion for FY 2023-2029. Earlier in this article, I also made reference to a new partnership between NVDA and Jaguar Land Rover in the automotive space that was recently announced.

In summary, NVIDIA Corporation’s FY 2022 total revenue of $26.9 billion is less than 3% of its estimated TAM of $1 trillion in aggregate, which comprises of $100 million in gaming TAM, and the automotive, chips & systems and software businesses each boasting a $300 billion TAM.

In five years’ time, NVDA’s revenue is forecasted to grow by a CAGR of +21% to $69.9 billion in FY 2027 as per market consensus data sourced from S&P Capital IQ. This figure will just represent under 7% of the company’s total TAM which suggests that the five-year revenue growth outlook for NVDA is realistic.

Is NVDA Stock A Buy, Sell, or Hold?

NVDA stock is a Hold. NVIDIA Corporation still has a long growth runway ahead, comparing the company’s revenue with its TAM, but its valuations are fair based on the forward P/E metric.

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