Nvidia (Nasdaq: NVDA) stock jumped after the company’s phenomenal fourth-quarter earnings report, and everyone’s talking about a booming future for AI.
So now that the dust has settled, is Nvidia stock a buy today? Motley Fool Canada Chief Investment Officer Iain Butler puts Nvidia’s current stock price into context in this 5-minute video. (Prefer to read? Transcript below.)
Transcript
Nick Sciple: I’m Motley Fool Canada senior analyst Nick Sciple, and this is the ‘Five-Minute Major,’ here to make you a smarter investor in about five minutes. Today we’re discussing Nvidia’s (NASDAQ: NVDA) Q4 2023 earnings, where the AI chip giant continues to blow past market expectations. My guest today is Motley Fool Canada Chief Investment Officer Iain Butler. Iain, thanks for joining me.
Iain Butler: Great to be here. We’re gonna toss our $0.02 into the ocean of information that’s out there. Right?
Highlights from Nvidia’s breathtaking Q4 2023 earnings
Nick Sciple: That’s right. Everybody is talking about Nvidia this morning as one of the already highest-valued companies in the U.S. stock market. Now up another 15% intraday after reporting another monster earnings result for the fourth quarter. Revenue surged 265% year over year and 22% quarter over quarter to $22.1 billion. Adjusted earnings per share increased 486% year over year and 28% sequentially to $5.16/share. The company doesn’t expect that growth to slow down anytime soon, either. Guidance for next quarter calls for $24 billion in revenue, another 234% year over year jump. Iain, I just read those numbers out to you. Thoughts hearing those and the stock’s reaction here in the market’s day?
Nvidia’s $1.7 trillion market capitalization
Iain Butler: I think that’s about the fifth time that I’ve heard or read those numbers, and every time I just shake my head. And I think my blink reaction is that those are numbers are usually reserved for sort of a microcap situation where a company’s sort of just hitting its stride in the growth phase of its life. This is a company that’s been around for years. It’s a massive market capitalization. I think $1.7 trillion. And I think when you compare these numbers to its peers in that north of trillion-dollar market cap world, these numbers are just unheard of. So it’s crazy. It’s crazy how Nvidia has hit its stride here in the past 12 months. It’s been a very successful company throughout its life. But it’s just finding new ways to be magical. I guess.
The rise of AI and ChatGPT
Nicholas Sciple: Right. This next leg of growth really has come out of nowhere with the rise of AI, ChatGPT and the like. So if you look at these numbers here, [its] really hard to find much to argue with. But, Iain, if you had to make a bearish argument for Nvidia right now, or raise any concerns, what would those be right now?
Iain Butler: Yeah. I want to emphasize again. This is a company that’s clearly got some magic cooking. A great, great company. But as investors, we then have to figure out — like there’s plenty of great companies out there, but that doesn’t always mean that they’re great stocks to own.
Risks of investing in Nvidia today
Iain Butler: So the question becomes, is this — from here — a great stock to own? It is priced to continue cranking out numbers like it just printed. And that’s tough to do. I came across some rough calculations that were published in the Financial Times about a week ago, and to justify Nvidia’s current share price, which is around $770, the person that published the numbers figured it needs to print about a 55% operating profit margin, which is sort of reserved for monopolies in the world. Very rare that that’s the case, or at least on a sustainable basis. And sales have to grow by 10-fold up from about $60 billion a year to more than $600 billion a year, and that’s an industry that had sales of $527 billion last year. So Nvidia essentially has to become what the semiconductor industry was over the past year to justify its current share price. So there’s very, very lofty expectations built in.
Nvidia’s current valuation
Iain Butler: And I think we can frame it another way. Another interesting stat: Nvidia is not the only company that’s worth $1.7 trillion, but Nvidia, Microsoft (NASDAQ: MSFT), Amazon (NASDAQ: AMZN) and Apple (NASDAQ: AAPL). These four individual companies on their own are worth more than the entire S&P 500 energy sector. That’s a sector that’s comprised of 23 companies. There are a lot of name brands within that sector and one company alone, just to pick one as an example. Exxon Mobil (NYSE: XOM) printed $36 billion in net income over the past 12 months. Nvidia’s net income was less than just that one company. So Nvidia is priced like the whole sector, whereas one company alone in that sector is earning more, essentially, more money per year than Nvidia. So again, it just says that a lot of growth is priced into Nvidia’s stock, and that’s a tricky sort of circle to square, if you will, when it comes to investing in the company.
How to think about investing in Nvidia stock today
Nick Sciple: Yeah, that’s right. Nvidia continues to beat expectations quarter after quarter, however, those expectations keep marching higher. The company is gonna have to run even faster to keep up, and sooner or later it’s gonna be challenging to maintain this type of growth. However, one of the best stocks on the market really powering a new wave in technology. So you know, not a company I would be in a rush to to reduce my exposure to anytime soon. Anyhow, that’s all our time we’ve got left for this edition of the Five-Minute Major. We’ll see you next time. Fool on!
