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Nvidia is the world’s most valuable company (again). What’s next for the AI chip king?

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1 month ago

November 11, 2024

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Nvidia is the world’s most valuable company (again). What’s next for the AI chip king?

Nvidia recaptured the most-valuable-company crown from Apple on Election Day and hasn’t looked back since then. The big question is what’s next for the AI chip powerhouse as Wall Street analysts and shareholders alike look ahead to Donald Trump’s return to the White House in less than 70 days. One thing that’s widely understood is the artificial intelligence revolution is still in its infancy, and Nvidia is the go-to company for what’s needed to run AI workloads. While heightened tensions with China during a second Trump administration could cause complications for Nvidia — and Apple, for that matter — we think the president-elect recognizes the importance of American companies leading the AI race and will craft policy accordingly. Wall Street still loves where Nvidia stands in that race, with multiple analysts on Monday raising their price targets on the stock ahead of the company’s earnings report on Nov. 20. Melius Research went to $185 per share from $165; Piper Sandler went to $175 from $140 and named the stock its top large-cap pick; and Morgan Stanley went to $160 from $150 while reiterating its top-pick status. All three research firms maintained buy-equivalent ratings. The notes from Piper Sandler and Morgan Stanley focused quite a bit on supply constraints for Nvidia’s next-generation Blackwell AI chips stretching well into next year, without explicitly touching on the changeover in the White House. Melius’ wide-ranging bullish note did briefly touch on Trump, saying his upcoming administration’s expected merger-friendly stance could give Nvidia runway to make some smaller acquisitions to round out its offerings. NVDA AAPL YTD mountain Nvidia’s year-to-date stock performance versus Apple. While Nvidia has certainly had an incredible run since the late 2022 release of OpenAI’s ChatGPT, which kicked off the greatest data center spending spree in history, all three analysts believe we’re still only in the early stages. Given the capital expenditure intentions offered by the megacap tech companies in the past few weeks, we certainly agree. Highlights from their most recent earnings conference calls tell the story. Alphabet : “With respect to CapEx, our reported CapEx in the third quarter was $13 billion, reflecting investment in our technical infrastructure with the largest component being investment in servers followed by data centers and networking equipment. Looking ahead, we expect quarterly CapEx in the fourth quarter to be at similar levels to Q3,” said CFO Anat Ashkenazi on the Google parent’s third-quarter earnings call. “As we think into 2025, we do see an increase coming in 2025,” she added later. “And we will provide more color on that on the Q4 call, likely not the same percent step-up that we saw between 2023 and 2024, but additional increase.” Meta Platforms : “We anticipate our full-year 2024 capital expenditures will be in the range of $38 billion to $40 billion, updated from our prior range of $37 billion to $40 billion. We continue to expect significant capital expenditure growth in 2025,” CFO Susan Li said on its Q3 call. Amazon : “We expect to spend about $75 billion [in CapEx] in 2024. I suspect we’ll spend more than that in 2025,” CEO Andy Jassy said last month. “And the majority of it is for AWS and, specifically, the increased bumps here are really driven by generative AI.” Microsoft : “We expect capital expenditures to increase on a sequential basis, given our cloud and AI demand signals,” CFO Amy Hood said. “As long as we continue to see that demand grow … the growth in CapEx will slow and the revenue growth will increase,” Hood later added. The growth rate might slow, but the implication is still that it will grow. These CapEx comments serve to support the analysts’ bullishness on Nvidia’s stock from here. As adoption of the new technology grows, so too will spending on AI chips, sometimes known as AI accelerators. The best of those chips are made by Nvidia. In fact, the analysts at Piper Sandler estimate that the total addressable market for accelerators will increase by about $70 billion in 2025, with the bulk of that increase going to Nvidia. Analysts pointed to Big Tech’s recent earnings call commentary to support their view. “All else equal, we see at least sustained levels of capex through 2025, if not accelerated with a shift towards chips [and] servers,” while spending on buildings and other fixed property declines, Piper analysts wrote. “We think this clearly benefits NVDA in the near to mid-term future,” which led them to revise higher their financial estimates for the company’s coming quarters. Pricing also stands to remain favorable for Nvidia, thanks to projected supply crunches for its next-gen Blackwell chips and even some lines of its current Hopper generation, according to Morgan Stanley analysts. In the immediate term, Nvidia’s gross margins may feel a little pressure due to the Blackwell manufacturing ramp-up. However, Wall Street now understands this and is modeling for it accordingly , so we’re not too concerned about that weighing on the stock. Analysts at Melius Research, the most bullish of these three firms, went as far as comparing Nvidia to Apple in the wake of the first two versions of the iPhone released in 2007 and 2008, respectively. “So, while it sounds strange, giving up on Nvidia here after its hit – Hopper – is like giving up on Apple at iPhone 1 or [iPhone 3G],” Melius wrote. To be sure, analysts cautioned that evidence of “insane” Blackwell demand – to use the language of CEO Jensen Huang – will not be fully captured in Nvidia’s upcoming earnings report, given the transition between product generations. For that reason, much of the focus when Nvidia reports will be on management’s guidance and demand commentary, as has been the case in recent quarters. Bottom line Put it all together, and clearly nobody denies that demand for Nvidia’s chips remains insatiable. The question for investors then: Is that already priced into the stock, or is the current valuation supportive of further upside in 2025? Put another way, can the world’s most valuable company, at nearly $3.6 trillion, get even more valuable? On current numbers, Nvidia is trading at about 37x calendar year 2025 earnings estimates. That’s not exactly cheap, but it is less than Nvidia’s five-year historical valuation of 40.5 times forward earnings estimates, according to FactSet. And, crucially, that may well prove conservative if management offers better-than-expected guidance next week. Ultimately, the valuation is more than reasonable if, like us, you’re taking a longer-term view on Nvidia and the overall buildout of generative AI infrastructure. It may not happen in a straight line, but it is needed and should lead to robust demand for Nvidia’s products for years to come as adoption of AI grows among consumers, companies and even countries. Of course, things could also get a little bit choppy if the so-called chip war with Beijing ramps up under another Trump presidency (remember, we saw the Biden administration twice crackdown on semiconductor exports to China in recent years). Even still, we agree with the Melius view that this is only the early days of AI. While Trump may look to hold back China in many ways, our expectation is that those policies will not stand in the way of U.S. companies advancing their leadership in AI technology and developing fresh cutting-edge applications. Doing so will mean more demand for Nvidia’s full suite of products and, by extension, more gains for its stock. The best way to capture the most upside is our “own it, don’t trade it” mantra. (Jim Cramer’s Charitable Trust is long NVDA, AAPL, AMZN, GOOGL, MSFT and META. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Visitors check out Nvidia’s AI technology at the 2024 Apsara Conference in Hangzhou, China, on September 19, 2024.

Costfoto | Nurphoto | Getty Images

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