A Year to Remember
If you are unfamiliar with the Magnificent Seven, they consist of Nvidia (NVDA 1.50%), Apple (AAPL 0.96%), Microsoft (MSFT 0.27%), Amazon (AMZN 0.23%), Alphabet (GOOG 0.21%) (GOOGL 0.06%), Meta Platforms (META 0.50%), and Tesla (TSLA -1.47%). These companies not only lead their respective industries but also boast massive revenue and profits, trusted brands, and the undivided attention of investors and consumers.
Although popular stocks do not always perform well, 2023 was an extraordinary year for these tech giants.
It is crucial to consider the context, as these stocks have witnessed astronomical growth while their valuations have mostly followed suit. Their forward price-to-earnings ratios have experienced increases of up to 160%, barring one exception.
Surprisingly, chip company Nvidia’s forward earnings valuation actually decreased despite its substantial share price growth this year. This is due to Nvidia being at the forefront of a generational growth opportunity, similar to the impact of the internet or cloud technology on the modern economy.
A $2 Trillion Industry in the Making
Industry analysts estimate that Nvidia holds a market share ranging between 70% and 95% within the AI chip sector, effectively dominating an industry that attracts billions of dollars in investment. This dominance is evident in Nvidia’s financials, where significant revenue growth has been observed throughout 2023.
Rival company Advanced Micro Devices’ CEO, Lisa Su, predicts that the AI chip market will expand to over $400 billion in the foreseeable future.
Even if AMD and other competitors erode Nvidia’s market share, the overall growth of the market could offset a substantial portion of the losses. It is important to note that Nvidia’s current companywide revenue stands at $45 billion. Therefore, a $400 billion chip market dominated by Nvidia should translate into several years of sustained revenue growth.
Remarkably, Nvidia’s Stock Remains Affordable
If these predictions hold any truth, one could argue that Nvidia’s current valuation remains relatively inexpensive. Analysts anticipate Nvidia’s earnings per share to reach approximately $12.29 for this year.
Growth expectations soared as Nvidia’s expansion accelerated, proving the significant impact AI can have on its business.
With earnings growing at an impressive rate of 39%, a price-to-earnings ratio of 38 indicates a favorable valuation. However, it is important to acknowledge the associated risks. Nvidia must meet these high expectations, and considering its stock has surged by over 200% since January, investors should anticipate some volatility.
Nonetheless, when considering the big picture, it seems highly unlikely that the long-term trend for AI will point anywhere other than upward. Nvidia currently commands the majority share of the AI chip market, serving as the fundamental building block for this revolutionary technology. This positions the company in an advantageous position and presents a remarkable opportunity for investors to ride Nvidia’s ascent.