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Does the Nvidia stock’s growth drivers justify the price tag?

Nvidia’s [NVDA] stock had a phenomenal 2021. Surging more than 100% over the last 12 months, Nvidia’s stock has benefited from solid earnings and profitability in the underlying business.

2022 could see even more tailwinds power the stock. Among these are the development of the metaverse, the protracted semiconductor crunch, and the inexorable increase of computing systems that require the chips Nvidia manufactures. 

These could all help the stock’s market cap cross the $1tr mark this year  - it reached $800bn in November 2021.

But is the current share price overvalued? Or – given the volume of possible tailwinds – will Nvidia’s stock’s trajectory get back to where it was throughout 2021?





What’s happening with Nvidia’s stock


Despite the excellent run, Nvidia’s stock hasn’t been helped by the market-wide tech pullback that started the new year. Since the start of the year, the stock is down 11.9% to close Tuesday at $259.03. Rival AMD [AMD] has also been hurt by the pullback, dropping 8.3% over the same stretch. This dip could present a chance for investors to pick up a fundamentally rock solid company.


Is Nvidia’s stock a buy?

Powering the lofty valuation is growing sales. In the third quarter, Nvidia posted adjusted earnings of $1.17 a share, up 60% year-on-year. Revenue came in at $7.1bn, up 50% year-on-year. Both figures topped Wall Street expectations.

One of the biggest growth drivers for Nvidia’s stock has been its data center business. In the third quarter, data center revenue was up 55% year-on-year to come in at $2.9bn as ‘hyper scale’ customers turned to Nvidia to provide graphics processes needed for artificial intelligence applications.

For the current year, Nvidia is forecast to bring in $26.68bn in sales, a 60% year-on-year jump, while for the quarter ending January, the chipmaker is guiding for earnings to come in at $7.4bn, topping the expected $6.86bn.

However, for the year ending 2023, sales growth is expected to slow to 19.1%, according to Yahoo Finance, coming in at $31.77bn.


Will Nvidia break $1trn?


Looking ahead, what could help Nvidia break the $1trn mark is its exposure to three major trends in tech, according to The Street’s Bernard Zambonin. The first is the global semiconductor market, which Zamonin suggests could be worth $803.15bn in 2029. The second is the global gaming market, forecast to have a CAGR of 14.5% to 2026. And finally the AI market, which is predicted to be worth $641bn by 2028, growing at a CAGR of 36%.


Valuation the AI market is predicted to reach by 2028


The counterargument is that Nvidia’s stock could be a little stretched, a little overvalued. Investors may expect a period of stagnation relative to last year’s growth. A forward price to earnings ratio of ​​58.82 isn’t cheap, with rival AMD carrying a 42.19 forward P/E, so investors are arguably paying a premium for Nvidia.

“Even if its current valuations are stretched, it wouldn't surprise me if the market reaction to Nvidia remains favorable, driven by the potential of the growing markets it serves,” writes Zamboni.

Among the analysts, Nvidia has a $341.20 price target - hitting this would see a 25% upside on Tuesday's close.


Nvidia still trying to get ARM deal signed off


Not going to plan is Nvidia’s proposed acquisition of UK chip designer ARM from Softbank. The $40bn deal is likely to miss its March target deadline as regulators worry that it will reduce competition and lead to higher prices.

In the latest twist, Nvidia has written a 28-page submission to the U.K.’s Competition and Markets Authority outlining why the deal should be approved, arguing that ARM’s market position is overstated. In the US, the Federal Trade Commission sued to block the deal going through on antitrust grounds in December, while the European Commission has also launched its own investigation.

A potential headache for the chipmaker. But how much this affects the stock’s quest to hit the $1trn valuation is debatable. The next major date for investors will be fourth quarter earnings which are due towards the end of February.

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