By Emily Bary
There are many factors that can drive a stock higher, but for Nvidia, organic revenue growth is paramount
How can Nvidia Corp.'s stock keep the party going after a massive outperformance in recent years that has catapulted the company above a $3 trillion market capitalization?
The answer is simple, according to Truist Securities analyst William Stein: Nvidia (NVDA) can continue to sport attractive organic revenue growth.
Other factors could drive a stock higher, but those don't seem to make sense for Nvidia, according to Stein. For instance, he sees it as "highly unlikely" that Nvidia shares will see multiple expansion, as they currently trade at 44 times forward earnings. Meanwhile, operating margins that are "pushing 70%" probably can't go much higher either, he said.
"Large acquisitions would face intense scrutiny, so seem unlikely to move the needle, and buybacks, while effective, are unlikely to deliver significant returns given the current P/E multiple," Stein wrote.
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So stellar organic revenue growth seems like the best path forward for Nvidia's stock. "We do have relative confidence that NVDA will continue to grow revenue (& EPS) organically faster than the S&P [500]," Stein wrote.
He's intrigued by Nvidia's ability to grow unit sales of artificial intelligence servers. "While AI server revenue growth is feverish (we estimate 70% this year), unit growth is just getting going," he wrote.
By his estimates, about 4.75 million server graphics processing units were shipped last year, compared with roughly 20 million server central processing units.
Read: Nvidia faces an ever-higher bar. How Morgan Stanley says to play its stock.
"We anticipate this 23% attach rate will grow to 35% in 2024 and will approach 100% by 2030," he wrote. "Assuming no server unit growth whatsoever, this implies a 22% GPU unit [compound annual growth rate] through 2030."
He also sees potential in Nvidia's content growth: "While [Nvidia] has been building a full-stack company (via CUDA) for over 20 years, the company is very early in selling truly full stack solutions, having transitioned from chips to servers (HGX) only a few years ago, to integrated server racks (NVL72) currently."
That shift has helped drive acceleration in revenue and earnings growth over the past year and could continue to bring benefits, Stein said.
Stein has a buy rating and $140 target price on Nvidia shares, which are up 1.5% in premarket trading Wednesday. That suggests a $133.40 price if that action continues in the regular session. That gets the stock closer to its record high of $135.58 seen on June 18.
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-Emily Bary
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07-10-24 0820ET
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