Nvidia (NVDA -3.00%) investors endured a difficult time on the market since the company released its fiscal 2024 second-quarter results (for the three months ended July 30) on Aug. 23. That fact may seem surprising, given that tech giant grew at an eye-popping pace this year thanks to the increased adoption of artificial intelligence (AI).
Nvidia's revenue shot up 101% year over year in fiscal Q2 to a record $13.5 billion. The company's immense pricing power in AI chips led to even faster growth in the company's bottom line, with its earnings jumping a whopping 429% year over year in Q2 to $2.70 per share.
The guidance was even better, as the chipmaker's management anticipates its fiscal Q3 revenue will increase at a faster pace of 170% year over year to $16 billion. Analysts expect Nvidia to miss that mark. According to the average estimate of 31 analysts covering the stock, Nvidia's fiscal Q3 revenue is expected to land at $15.2 billion.
It looks like Wall Street has tempered its expectations following the fresh restrictions imposed by the U.S. Commerce Department on sales of its AI chips to China, with some of them reportedly coming into effect in the company's recently concluded fiscal Q3. However, there is a good chance Nvidia could live up to its forecast and crush Wall Street's expectations when it releases its results on Nov. 21. Let's see why that could be the case.
The export restrictions may not be able to stymie Nvidia's terrific growth
Nvidia CFO Colette Kress pointed out on the company's August earnings conference call that China accounted for 20% to 25% of its data center revenue in fiscal Q2. Nvidia's data center segment generated a record $10.3 billion in revenue last quarter. So China would have accounted for $2 billion to $2.5 billion of Nvidia's top line, or 14% to 18% of its total revenue.
Given that the restrictions came into effect toward the end of Nvidia's fiscal third quarter, it is likely that they may not have a big impact on the company's upcoming results. Of course, investors may worry about the long-term implications of the restrictions. However, Nvidia remains confident it can maintain its impressive growth, even if the ban on sales to China means the loss of an opportunity.
According to Kress:
Given the strength of demand for our products worldwide, we do not anticipate that additional export restrictions on our data center GPUs, if adopted, would have an immediate material impact to our financial results.
Another reason why the restrictions are unlikely to dent Nvidia's prospects is because of the sheer size of the global AI chip market beyond China. It is estimated that the Chinese AI chip market could be worth $6 billion in 2025. For comparison, Gartner estimates that the global AI chip market could hit $53 billion in revenue in 2023 and grow to $119 billion by 2027. This means there is still a huge market for Nvidia to tap into, even if the China-related restrictions cause a "permanent loss of an opportunity," in the words of Kress.
Also, Nvidia won't be saddled with any unsold inventory if supplies to China are stopped, as its flagship H100 processor reportedly commands a waiting period of more than six months. It can simply shift its inventory to other markets to satisfy the booming demand for its processors, which also explains why the company has been focused on improving the supply of its AI chips.
Nvidia's foundry partner Taiwan Semiconductor Manufacturing, popularly known as TSMC, pointed out on its October earnings conference call that "AI demand continues to grow stronger and stronger," and the company didn't have enough capacity to support the same. As a result, TSMC plans to double its capacity to make advanced chips by the end of 2024 and increase the same in 2025 as well.
All this explains why there are reports suggesting that Nvidia aims to triple the output of its H100 graphics card in 2024. This should allow the company to corner a bigger share of the fast-growing market for AI chips and deliver healthy growth in the long run -- which is exactly what analysts anticipate from it.
NVDA Revenue Estimates for Current Fiscal Year data by YCharts
The stock is relatively attractive right now
Nvidia's stock currently trades at 108 times trailing earnings and 34 times sales. Those multiples aren't cheap, but the stock was even more expensive a few months ago.
NVDA PS Ratio data by YCharts
Nvidia's earnings multiple has come down from almost 240, while its sales multiple stood at 45 just three months ago.
Also, the company's forward sales and earnings multiples are much lower than its trailing multiples, pointing toward robust growth in its top and bottom lines.
NVDA PE Ratio (Forward 1y) data by YCharts
All this means that savvy investors can consider buying Nvidia while it is trading at a relatively lower valuation, especially considering that a strong set of results in late November could help it regain its mojo, making it expensive once again.
