Nvidia (NVDA -3.00%) has multiplied investors' wealth handsomely over the past year. Share prices of the semiconductor giant are up 223% during this period, leading some to wonder if this high-flying stock can sustain its momentum in the coming year as well -- especially considering the inflated valuation it is trading at right now.
With an impressive surge in the past year, the stock is now trading at 106 times earnings and 33 times sales. Those multiples are way higher than Nvidia's earnings multiple of 62 and sales multiple of 13 at the end of 2022. So it won't be surprising to see investors getting tempted to sell Nvidia stock and book profits.
However, doing so could be a mistake. There is a solid chance that Nvidia can sustain its terrific run over the next year as well. At least that's what the analysts seem to think. Nvidia has a 12-month median price target of $623 according to 44 analysts covering the stock, which points toward a 42% jump from current levels.
Let's look at the reasons why Nvidia could hit -- or even exceed -- that price target over the next year.
Nvidia's primary catalyst is going to get stronger
The data center business is Nvidia's biggest growth driver at the moment. The company's revenue in the first two quarters of fiscal 2024 (for the six months ended July 30, 2023) jumped 38% year over year to $20.7 billion. The data center business produced $14.6 billion of this, which translates into just over 70% of Nvidia's top line.
It is worth noting that Nvidia's data center revenue jumped from $4.3 billion in fiscal Q1 to $10.3 billion in the following quarter. The segment accounted for 59% of the company's total revenue in the fiscal first quarter, but its influence increased remarkably in fiscal Q2 to 76% of the top line. This eye-popping growth is the result of the red-hot demand for Nvidia's H100 and A100 data center graphics processing units (GPUs) that are being deployed in servers for training artificial intelligence (AI) models.
From major cloud service providers to start-ups building generative AI applications to governments around the world, it seems like everyone is in a race to buy Nvidia's H100 processors -- with reported waiting times of more than half a year. And this is an expensive piece of hardware, as each H100 processor reportedly goes for $40,000. Pricing, however, could vary and even exceed $70,000 based on configuration.
Nvidia's massive market share in AI processors -- which according to some estimates could be over 80% and may even increase to more than 90% -- explains just why its data center business has boomed lately. A combination of strong volumes thanks to its dominant market share and solid pricing power in AI processors has been its biggest growth driver in the current fiscal year.
The good news for Nvidia investors is that this catalyst is about to get even stronger. The Financial Times estimates that Nvidia is on track to sell 550,000 of its H100 GPUs in 2023. Assuming an average price of $40,000 a unit, that would translate to $22 billion in revenue this year. Of course, the company has other data center chips in its portfolio as well, such as the Grace server processor and the A100 data center GPU (which was used for training ChatGPT). So its annual revenue from this segment could be higher in fiscal 2024.
All this indicates that Nvidia's data center revenue could jump substantially in the second half of the fiscal year, and this is precisely what its guidance indicates. Nvidia's fiscal Q3 revenue guidance of $16 billion would be a 170% jump over the prior year. Assuming three-fourths of this comes from the data center business, just like last quarter, the segment's revenue would stand at $12 billion in the current quarter.
Even better, Nvidia is expected to close fiscal 2024 with a whopping 190% year-over-year increase in revenue to $17.5 billion, according to analysts' estimates. That would bring the company's annual revenue to $54.6 billion, which would be a 102% spike over fiscal 2023. More importantly, Nvidia is expected to carry its outstanding momentum into the next fiscal year as well, with analysts expecting its top line to jump 49% to $81 billion.
But don't be surprised to see Nvidia deliver an even better performance next fiscal year. The company expects to at least triple its shipments of the H100 processors in 2024, with The Financial Times estimating that it may even ship up to 2 million units.
Assuming Nvidia does ship between 1.5 million and 2 million of its H100 AI-focused GPUs next year, driven by the support of its foundry partner that's looking to substantially improve capacity, its revenue from this chip alone could range between $60 billion and $80 billion (assuming an average price of $40,000). As such, there's a strong possibility of Nvidia exceeding analysts' growth estimates, and that could translate into a stronger upside for investors.
How much upside can investors expect?
Although analysts expect a 40%-plus upside from Nvidia in the coming year, the high-end price target of $1,100 indicates that Nvidia could rise an astounding 150% from current levels.
We have already seen that Nvidia's revenue could rise to $81 billion next fiscal year based on Wall Street's estimates. Multiplying that by the company's forward price-to-sales ratio of 20 would translate to a market cap of $1.6 trillion, up 50% from current levels. However, stronger gains cannot be ruled out. Nvidia seems capable of delivering higher revenue as the estimated H100 shipments indicate, helping this AI stock inch closer to the Street-high price target in the coming year.
