Even after a significant recovery over the previous year (it rose 43% in 2023), the Nasdaq Composite index is still down around 7% from its record high. Although history performance does not guarantee future outcomes, there is a correlation historically between growth stock success and lower interest rates.
According to some observers, interest rate reductions by the Federal Reserve will start this year. Rate reductions typically result in lower bond yields, which lowers the cost of borrowing money. Additionally, these circumstances usually make equities a more desirable investment option. Apart from favourable value drivers resulting from interest rate reductions, robust demand for artificial intelligence (AI)-related enterprises may contribute to the Nasdaq’s robust growth in 2024.
The industry leader in high-performance graphics processing units (GPUs) is Nvidia. Although these hardware innovations were first employed in video games, artificial intelligence (AI) and cloud computing now depend heavily on them. At now, the business holds around 90% of the market share for high-performance GPUs. It appears that its competitors, Advanced Micro Devices and Intel, will not be able to catch up with its technological advancements very soon. Nvidia is thus anticipated to be among the main beneficiaries of the still-emerging AI revolution.
Nvidia has already released impressive commercial data. For the three months that ended on October 29, 2023, or Q3 of fiscal 2024, the following are some salient performance indicators:
Notably, Nvidia predicted that the phenomenal rise would continue in the fourth quarter of fiscal 2024. The company’s midpoint sales objective of $20 billion in revenue translates to an approximate 231% annual growth rate. The business anticipates further margin growth in the interim, with a projected slight increase in adjusted gross margin to 75%. It’s also important to note that, over the last year, Nvidia’s advice has shown to be quite cautious.
In contrast, Microsoft, which trades at a projected PE of 34, saw profits growth of 27% year over year in its most recent quarter. In contrast, Apple has a forward PE of about 28 and increased its earnings by 13% year over year in the most recent quarter that was published.
Considering how rapidly Nvidia has been growing, the company’s current PE may suggest that the stock is well priced. Given its growth, why is the market leader in GPUs selling at such a low earnings multiple? The main cause is that Nvidia’s operations have always been subject to periodic fluctuations in performance.
The corporation is taking steps that may lessen its susceptibility to next cyclical downturns, but it’s possible that the benefits of AI will continue to be overestimated. The goal of these projects is to develop software and service components that regularly provide large profits from recurring revenue sources.
Being the top supplier of GPUs for applications requiring high speed computing, Nvidia is in a prime position to establish its own data centre company. The firm has just begun to grow its AI-as-a-service (AIaaS) division; it is quite likely that this endeavour will decrease cyclicality and create new, high-margin revenue streams.
Nvidia trades at earnings multiples that appear low given its amazing momentum and potential, and it is still in the early stages of capitalising on significant long-term trends related to the AI revolution.
Investor willingness to ascribe considerably higher growth-dependent valuation multiples to equities is feasible if the Fed adopts a policy of dramatically lowering interest rates this year and going forward. Nvidia stock is a wonderful way to play AI trends, even though there’s no certainty that rate reduction and AI will drive the Nasdaq to new highs this year.