Will The Blackwell Launch Drive Nvidia Stock To $1,000?

Nvidia (NASDAQ: NVDA) revealed its latest flagship GPU chips targeted at artificial intelligence, as it looks to widen its dominance in the AI race.  The new processors dubbed the B200 and GB200 are built on the new Blackwell architecture and succeed the company’s two-year-old Hopper architecture. Nvidia is touting sizable improvements in key areas including lower energy consumption and higher performance – two crucial areas in training large language models. The chips are between seven and 30 times faster than the H100 and use 25x less power, enabling customers to train and run AI models more efficiently. For instance, Nvidia estimates that training a model with 1.8 trillion parameters would have previously called for 8,000 Hopper GPUs and 15 megawatts of power, versus just 2,000 Blackwell GPUs with 4 megawatts of power. The company expects the chips to be used by major players including Amazon Web Services, Dell Technologies, Google, Meta, Microsoft, OpenAI, as well as Tesla. Moreover, with the new chips, Nvidia is focusing not just on selling the GPUs themselves, but also on entire systems, packing them into larger designs including the GB200 NVL72, which integrates 36 central processors and 72 GPUs into a single liquid-cooled rack.

NVDA stock declined by about 2% in after-hours trading on Monday following the unveil, although it remains up by 79% thus far in 2024 and by over 3x in the past 12 months. There’s a lot of reason for the optimism with Nvidia stock.  As the artificial intelligence arms race gathers pace, technology companies and developers scramble to buy high-end graphics units to deploy generative AI into their applications and software. The company saw revenue for Q4 FY’24 grow by 265% year-over-year to $22.1 billion, while net income surged to $12.3 billion, up from $1.4 billion in the year-ago period. Nvidia’s performance lead and the software ecosystem it has built around its chipsets are likely to help the company maintain an edge over rivals and maintain thick margins.  Gross margins stood at a lofty 76% in the most recent quarter, up from about 63% in the year-ago period. Net margins stood at a substantial 55% in Q4.

Looking at a slightly longer period, NVDA stock has seen extremely strong gains of 580% from levels of $130 in early January 2021 to around $885 now, vs. an increase of about 35% for the S&P 500 over this roughly 3-year period. However, the increase in NVDA stock has been far from consistent. Returns for the stock were 125% in 2021, -50% in 2022, and 239% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that NVDA underperformed the S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the Information Technology sector including MSFT, AAPL, and AVGO, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could NVDA face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see continued strength?

Looking at Nvidia’s valuation, the stock now trades at about 40x consensus 2025 earnings and 33x 2026 earnings. This is not an unreasonable multiple, considering Nvidia’s heady growth. That said, there are risks as well. Firstly, the big surge in GPU demand that we are currently seeing could potentially ease, as the initial training phase of AI large language models slows down. After the training of models, the phase of utilizing these models could shift toward lower-power requirements, or potentially even on-device capabilities, reducing demand growth for GPUs. Moreover, at the current valuation, the market might be pricing in that Nvidia will essentially own the AI chip market. However, this may not be the case. Players such as AMD are investing considerably to catch up in this space given the high stakes. Additionally, big tech players such as Google, Microsoft, and Amazon are also doubling down on developing their own AI and machine learning-related silicon. This could also pose a risk for Nvidia, as the big tech players remain the company’s largest customers. Over FY’24, the company indicated that a single customer (which was not named) accounted for 13% of its overall revenue. We value NVDA at about $731 per share, 17% below the current market price. See our analysis on Nvidia Valuation: Is NVDA Stock Expensive Or Cheap? for more details on what’s driving our price estimate for NVDA stock.

[1] Returns as of 3/19/2024
[2] Cumulative total returns since the end of 2016

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