Nvidia stock (NYSE: NVDA) is already the best-performing S&P 500 and has almost tripled this year. While some market observers are concerned about the stock’s valuation, Goldman Sachs raised its target price and sees more upside for the chipmaker.
Goldman Sachs analyst Toshiya Hari maintained his buy rating on Nvidia while raising his price target from $440 to $495 and called it a “key enabler of traditional AI.”
Notably, the AI euphoria triggered a rally in Nvidia stock and it became a trillion-dollar market cap company.
Nvidia posted better-than-expected earnings in the fiscal first quarter
Nvidia reported revenues of $7.19 billion in the fiscal first quarter of 2024– well ahead of the $6.52 billion that analysts were expecting. The adjusted EPS of $1.09 was also higher than the 99 cents that analysts were expecting.
Importantly, it guided for revenues of $11 billion in the current quarter which smashed the consensus estimate of $7.15 billion.
NVDA is benefiting from the AI boom
The AI segment helped Nvidia post better-than-expected earnings. The company’s CEO Jensen Huang said “The computer industry is going through two simultaneous transitions — accelerated computing and generative AI.”
He is bullish on the company’s AI business and said, “A trillion dollars of installed global data center infrastructure will transition from general purpose to accelerated computing as companies race to apply generative AI into every product, service and business process.”
The company’s CFO Colette Kress also echoed similar views and said, “Generative AI is driving exponential growth in compute requirements and a fast transition to NVIDIA accelerated computing, which is the most versatile, most energy-efficient, and the lowest TCO approach to train and deploy AI.”
She added, “Generative AI drove significant upside in demand for our products, creating opportunities and broad-based global growth across our markets.”
Notably, the demand for Nvidia’s chips has skyrocketed as an increasing number of companies are building AI models.
Goldman Sachs expects Nvidia stock to rally further
Goldman Sachs expects the rally in NVDA stock to continue. In his note, Hari said, “Supported by its competitive moat founded on consistent investments in hardware and software, Nvidia has been a key enabler and beneficiary of traditional AI for nearly a decade.”
He added, “The recent step-function increase in the company’s Data Center revenue outlook, however, suggests that the company has entered a new phase of growth driven by the emergence and proliferation of Generative AI.”
Notably, after Nvidia’s earnings call in May, several analysts raised the stock’s target price.
Goldman Sachs believes that training large language models could be a $13 billion revenue opportunity for Nvidia in a base case – but its estimates rise as high as $316 billion in the bull case.
China export restrictions are a risk for US chipmakers
Last year, the US imposed restrictions on exports of several chips to China including Nvidia’s A100. The company however managed to circumvent the ban by selling A800 chips to China whose performance was below the limits that the Commerce Department had set.
The Wall Street Journal reported that the US Commerce Department is considering imposing restrictions on chip sales to China and the rules might be announced in July.
Nvidia has tried to downplay the impact of any further export restrictions and Kress said, “We are aware of reports that the U.S. Department of Commerce is considering further controls that may restrict exports of A800 and our H800 products to China.”
She however added, “However, given the strength of our demand for our products worldwide, we do not anticipate that such additional restrictions, if adopted, would have an immediate material impact on our financial results.”
Kress meanwhile warned that in the long term, such restrictions would mean a permanent revenue loss for the US chip industry.
US-China Tech War
There is an apparent AI war going on between the US and China as tech giants of the world’s two biggest economies are competing against each other in the emerging technology.
Rising US-China tensions are a risk for chipmakers that count China as a major market. Nvidia for instance gets about a fifth of its revenues from China. Notably, chip stocks crashed in 2018 amid the escalation in the US-China trade war.
Former President Donald Trump imposed tariffs on most Chinese imports and also blamed China for the spread of the coronavirus.
US-China tensions have not come down in Biden’s tenure and if anything, they might have only increased.
Analysts are getting bullish on Nvidia
Last month, Daiwa upgraded Nvidia stock from hold to outperform and said, “Post our recent tech tour and checks, we have a higher level of confidence that Nvidia’s commanding position for AI, and Generative AI, will be difficult to replicate near term by the competitors such as AMD, Intel and others. Why? AI benefits most from a full scale solution.”
Meanwhile, Cathie Wood of ARK Invest missed the rally in NVDA stock as the growth-oriented fund manager sold the stock before its humongous rally. She has tried to defend her move by saying the stock was “priced ahead of the curve” but most Wall Street analysts believe that Nvidia stock is reasonably valued given its strong growth prospects amid the AI pivot.
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