In the rapidly evolving artificial intelligence (AI) industry, NVIDIA Corporation has emerged as a dominant force as its portfolio of advanced chips used to power data centers is a favorite among the cloud providers that support this revolution.

However, its unprecedented growth is presenting a unique challenge to Wall Street analysts: coming up with projections and predictions for the company’s future stock price, sales, and profits as they will be primarily influenced by how the company fares in this particular market.

This year alone, the stock has delivered remarkable gains of nearly 145% despite experiencing a precipitated drop in the past couple of days, possibly as investors are cashing out on some of these outsized gains.

The Challenge of Forecasting NVIDIA’s Revenues and Valuation

For more than a year, a significant increase in the demand for NVIDIA’s AI chips has consistently beat Wall Street quarterly financial projections. This above-average growth has complicated things for analysts, whose job is to predict how the company will perform in the coming quarters.

NVIDIA becomes most valuable US listed company

What appears to be even more striking is that the company’s executives are experiencing a similar issue as they are finding it very hard to estimate how the next quarter will look as sales are heavily dependent on how the company manages to meet the significant demand for its high-performance chips.

Since the fiscal quarter that ended on April 2023, the company has managed to exceed its average revenue forecast by approximately 13%. Moreover, in August, the company reported total sales that exceeded its projections for the quarter by 2023 – the biggest beat delivered by NVIDIA since 2013 according to data from Bloomberg.

Supply is the most uncertain variable to assess according to Morningstar analyst, Brian Colello, who covers the chipmaker’s stock. NVIDIA has long struggled to produce enough AI chips to go around, but Colello highlights that it has managed to increase its supply lately, which supports increasingly optimistic revenue targets.

Based on these positive estimates, Colello raised his price target for the company from $91 to $105 last month. Even though this is a positive signal for the business and the stock’s performance, NVIDIA is currently trading nearly 16% above this target.

“I’m not the first analyst to be raising my price target or fair value or being surprised that revenues are far ahead of what we thought a year ago,” he told Fortune Magazine this week.

NVIDIA Ranks Third Among S&P 500 Firms for Outperforming Revenue Estimates

The gap between analysts’ estimates and the results delivered by the company has made it difficult for analysts to adjust their projections for NVIDIA stock, which primarily relies on these variables as inputs for discounted cash flow (DCF) models.

In the past five quarters, sales have exceeded analysts’ estimates by 12% on average, which places it in the third spot among firms included in the popular S&P 500 index in terms of outperformance. The stock is currently covered by analysts from 20 different firms.

NVIDIA also became the third company in the United States to reach a $3 trillion market capitalization alongside Microsoft (MSFT) and Apple (AAPL). In fact, the firm briefly became the most valuable public company in the country when its valuation reached $3.34 trillion on June 18.

NVIDIA Valuation Metrics are a Bit Stretched

The company headed by Jensen Huang is also one of the most expensive in terms of valuation metrics with its stock currently trading 23 times above its projected sales for the next 12 months.

This high valuation metric – known as the price-to-forward-sales ratio – has raised concerns that the firm’s stock may be overpriced and may not accurately reflect its relatively uncertain growth potential.

NVIDIA’s financial results have been nothing short of spectacular lately. In its fiscal first quarter ending April 28, 2024, the company reported:

  • Revenues of $26.0 billion, up 18% from the previous quarter and 262% year-over-year
  • Record quarterly data center revenue of $22.6 billion, up 23% from the previous quarter and 427% year-over-year

These results demonstrate the explosive growth that NVIDIA has experienced due to the AI boom.

4 Factors Driving NVIDIA’s Sales and Profit Boom

Four factors stand out in the list of catalysts that have been pushing both the sales and stock performance of NVIDIA Corporation in past months including the rise of generative AI and the expansion of data centers owned and operated by cloud providers that need to strengthen their infrastructure to accommodate AI workloads.

nvidia important achievements and stock price

1. Rise of Generative AI

Generative AI software like ChatGPT from OpenAI and Claude from Anthropic have catalyzed a significant spike in the demand for high-performance chips that can support the heavy computing power demand that comes from training and running the AI models that power them.

These solutions have been embraced by students, professionals, companies, and government institutions rapidly to increase the efficiency of their internal processes and the overall productivity of their respective organizations.

If adoption continues to grow at a rapid pace, NVIDIA will benefit from this trend as data centers will continue to demand more and more chips from the cloud providers that support these solutions.

2. Data Center Expansion

The rise of AI technology has prompted data centers and cloud providers to invest heavily in expanding their capabilities by building new facilities, adding extra computing power, and enhancing their existing infrastructure as they are anticipating that workloads will continue to rise in the near future.

As long as NVIDIA can continue to deliver its chips, a significant chunk of the billions of dollars that data centers plan to invest in the next few years will likely be absorbed by the US-based chipmaker.

3. Gaming and Graphic Processing Units (GPUs)

Although AI is the most significant catalyst fueling the latest growth in NVIDIA’s sales, other segments including gaming may also keep contributing to the company’s revenue expansion.

The company’s GeForce RTX graphic processing units (GPUs) are a huge success among gamers and content creators who need extra computing power to deal with the high-resolution images and videos that are typically part of modern video games.

4. Automotive and Edge Computing

Another interesting segment that NVIDIA will likely benefit from is the automotive industry and the rise of smart infotainment systems added to modern vehicles. NVIDIA develops and manufactures chips that power these types of systems, which are becoming increasingly popular and common among the latest vehicle models – especially when it comes to electric vehicles.

Moreover, edge computing, a rising IT trend that involves using the client’s device to run the workloads associated with AI applications and other similar systems, could also benefit NVIDIA as the company has already been developing platforms like NVIDIA EGX™ and NVIDIA IGN Orin™ to provide solutions to this segment.

The Outlook for NVIDIA is Bright but Not Free of Challenges

The AI industry is expected to grow at a compound annual growth rate of 42% over the next decade, according to Bloomberg Intelligence. This sustained growth in AI adoption will likely keep fueling the demand for NVIDIA’s products.

However, despite its strong position in the market at the moment, NVIDIA faces a few challenges that could still impact its future performance:

  1. Increasing competition from other chip manufacturers like AMD and Intel that could soon launch products that undermine NVIDIA’s dominance in various segments.
  2. Tech giants like Alphabet (GOOG), Microsoft (MSFT), and Meta Platforms (META) developing their own AI chips.
  3. Potential regulatory challenges in the AI industry that slow down its growth.
  4. S. trade restrictions that affect the company’s sales to China – an important market for NVIDIA.

To maintain its competitive edge, NVIDIA must keep innovating and diversifying its product line. However, the company’s involvement in areas such as the metaverse, XR (extended reality), and supercomputing has already demonstrated its commitment to staying at the forefront of technological advancements.