Nvidia’s recent Q3 Fiscal 2024 financials are nothing short of extraordinary, with a record-breaking revenue of $18.12 billion. This is a whopping 206% increase year-over-year, a clear indication that Nvidia is outpacing its peers in the trillion-dollar market cap club. Just look at these year-over-year revenue growth rates for the latest quarter:
Nvidia +206%,
Amazon at +13%
Microsoft +13%
Alphabet +11%
Apple -1%.
The interest in AI has not gone away. More companies are diving into AI, and those already in the fray are ramping up their GPU investments to stay ahead in innovation, development, and market share.
This race is a boon for Nvidia, and the results are clear. The guidance for the next quarter is promising too, pegged at $20 billion, which indicates a staggering 230% YoY growth.
In FY21, Nvidia’s annual revenue was $17 billion. Now, they’re raking in more in a quarter than they did in a whole year back then! The net earnings have skyrocketed by 1,259% from a year ago to $9.2 billion. Last quarter’s earnings alone doubled the full year’s earnings of FY21.
Yet, despite these stellar results, Nvidia’s stock dipped in after-hours trading.
This can be pinned on concerns over the U.S. government’s export controls on advanced chips to China and other countries, which could bite into Nvidia’s business. Approximately a quarter of the company’s data center segment sales, a key revenue stream, are to countries under these export controls. Nvidia is planning to roll out products that comply with these regulations, but it expects a significant sales drop in these regions in Q4 FY24.
Another possible reason for the stock dip could be that high expectations had already been factored into the share price, which had risen by 22% from October 31, 2023, to November 21, 2023, post the stock correction. It seems like the market had already priced in the expectation of good results, leading some investors to cash in on the profits post-earnings announcement.
With such accelerated growth, I wonder if Nvidia’s value has surged, making it a fair buy. Here are the P/S ratios among the trillion-dollar stocks,
Nvidia at 38x
Microsoft at 13x
Apple at 8x
Alphabet at 6x
Amazon at 3x
Sure, Nvidia should command a higher P/S ratio due to its faster growth rate.
If we consider these P/S ratios dividend by their latest quarter’s YoY revenue growth rates,
Microsoft 1
Alphabet 0.5
Amazon 0.2
Nvidia 0.2
Apple being non-applicable due to negative revenue growth
Nvidia’s 208% growth rate makes its Price/Sales-Growth (PSG) ratio look low, the real question is whether it can sustain over 200% growth year-over-year going forward. As FY24 will be a higher base, it will become increasingly challenging to maintain this growth rate into FY25.
If Nvidia doubles its revenue in FY25 while maintaining a Price/Sales-Growth (PSG) ratio of 0.2, it could reach a market cap of $2 trillion.
However, if its growth slows to 50% in FY25 and the PSG ratio stays constant, its market cap could fall to $750 billion, which represents a 39% decrease. Alternatively, if the PSG ratio increases to 0.5, even with a slower growth rate, Nvidia’s market cap could soar to $1.9 trillion.
You can see the variance is huge and the valuation hinges on how long Nvidia can maintain this high-speed growth. Any slowdown could see a sharp correction in the share price as the valuation adjusts downwards. For me, this high uncertainty and difficulty in forecasting Nvidia’s future performance places it in the ‘too hard’ pile. The risk is simply too high.
