Nvidia (NVDA) Stock Price Prediction 2024: Is AI in a Bubble?

The AI powerhouse NVIDIA is grabbing the mindshare of most investors today with a spectacular rise of over 150% in the first 6 months of 2024. Is it time to buy or sell? Read on to find out our NVIDIA stock price prediction (aka our intrinsic value estimation), and whether AI is currently in a bubble. 

NVIDIA (NVDA) Stock Split

In case you’re not familiar with NVIDIA, they’ve recently announced a 10-for-1 stock split effective 07 June 2024. In short, every one share that you’ve previously owned would now turn into ten — and intuitively, the share price would be divided by ten. Just imagine a pizza being sliced into ten pieces, instead of being served as one pizza. However, the content of the pizza stays the same. 

Why Did NVIDIA Stock Split?

There are a few reasons as to why some companies opt for a share split, and they include:

• Increasing the liquidity around the stock as the reduction in share price can be deemed to be “more affordable” to a wider range of investors, leading to higher trading volumes. This is particularly important for the options market because each contract is equivalent to 100 shares. 
• Psychological factors also play a significant role as it might seem more accessible, even though the underlying value of the company hasn’t changed.
• It can also make employee stock options more attractive and affordable due to their smaller denomination for calculations.

NVIDIA Stock Split History

Interestingly, this is not the first time NVIDIA has offered a share split on its stock. Based on the past five stock splits, NVIDIA’s share price had seen a rather sizable pullback within the 3 to 6 months preceding each split. 

Well, let’s keep our fingers crossed. 

NVIDIA Stock Price Prediction 2024

So, where might NVIDIA’s stock price go from here? Should we stack up more shares or is it time to take profits off the table? Below, we share our analysis and forecast for this wildly popular AI stock. 

Note: This discussion is for educational purposes only. No one can predict short-term price movements with 100% certainty, so be sure to do your due diligence before making any investment decision.

Source: Piranha Profits’ True Value Finder

In a recent video by Adam Khoo – he outlined his NVIDIA valuation process using Piranha Profits’ proprietary tool, the True Value Finder. 

He adopted the latest free cash flow generated by NVIDIA over the last 12 months, and applied a growth rate of 40.74% for the first five years (which is the estimated growth of NVIDIA averaged across four notable financial providers). He slowed it down to 15% for the next five years, and using a discount rate of 8.1%, derived NVIDIA’s estimated intrinsic value per share to be around $1,221 per share (pre-split). 

That’s basically $122 per share after the 10-to-1 stock split. 

Typically, when a company sees an astronomical increase in their revenue and cash flow, we tend to be a little more conservative in projecting their future growth and earnings, by taking an average over the past three to five years. In NVIDIA’s case – it is one of those rare cases where we acknowledge a sea change and expect them to continue to profit significantly, despite this large base comparison. Hence, we use the trailing twelve months (without adjustment), and still expect it to grow 40% year-on-year for the next five years. 

However, we would just like to remind investors of two downside scenarios that could happen. Firstly, NVIDIA is ultimately in the semiconductor industry and they’re notorious for their cyclical nature. I think no one would question the superiority of its chip design and ecosystem, but when we make a simple discounted cash flow (DCF) projection, it is hard to account for this cyclicality (especially to guess and time the cycle). Secondly, existing circumstances are propping up NVIDIA’s margins substantially due to a supply constraint. 

Source: SeekingAlpha NVIDIA’s Financials

With that said, Wall Street analysts are currently projecting monstrous growth from NVIDIA in the following four years, as outlined by this infographic from Quartr. 

If we were to use the more conservative growth estimates of 33% for the first five years, NVIDIA’s intrinsic value would work out to be around $94 per share, suggesting a 30% premium from current prices. 

Source: Piranha Profits’ True Value Finder

When cross referencing current price targets offered by 40 analysts aggregated by Zacks, they established a range between $90 to $200, with an average target of $139 per share. Evidently, our estimate comes in closer to the conservative end (compared to Wall Street). 

Source: Zacks Investment Research

We do always believe in buying stocks with a margin of safety (i.e. when they trade at a discount). Therefore, we are sitting on our hands, waiting for Mr. Market to throw a tantrum. 

In the meantime, you can read up on 3 specific risks that we’ve identified around NVIDIA, and whether it’s an investment you want to make. 

Is AI in a Bubble Now?

Extending the discussion beyond NVIDIA (because they’ve been the poster child for this rise in AI stocks), some are wondering whether we’re in bubble territory right now. 

Register for our upcoming BEAT THE MARKET live online event and hear it from Adam Khoo (an 8-figure investor) himself! Fast action takers will receive his latest market report and exclusive investing e-book worth USD 147 in total. 

Now, back to the question. Goldman Sachs (GS) recently published a research report to try to answer this trillion dollar question, “Is there too much spend, and too little benefit from this GenAI investment cycle?” The report starts off with an interesting question. Tech giants and beyond are set to spend over $1 trillion on AI capex in coming years, with so far little to show for it. So, will this large spend ever pay off?

The report starts on a somber note, where Daron, who is a professor at MIT, is skeptical about the impacts of GenAI. He estimates that only a quarter of AI-exposed tasks will be cost-effective to automate within the next ten years, implying that AI will impact less than 5% of all tasks, and forecasts AI will increase US productivity by only 0.5% and GDP growth by only 0.9% cumulatively over the next decade. 

On the other hand, Joseph Briggs, a GS senior global economist, is a lot more optimistic. He estimates that GenAI will ultimately automate 25% of all work tasks and raise US productivity by 9% and GDP growth by 6.1% cumulatively. Automating many AI-related tasks isn’t cost effective today, but, similar to any advancement, the cost of deployment will probably go down the curve over the long run. 

Historically, there is strong evidence to suggest that past economic growth stems from technology-driven reallocation of resources and expansion of the production frontier. They found that 60% of workers today are employed in occupations that did not exist in 1940, and new occupations account for more than 85% of employment growth over the last 80 years.

GS estimates that the AI infrastructure buildout will cost over $1 trillion in the next several years alone, which includes spending on data centers, utilities and applications. So the crucial question is “What $1 trillion problem will AI solve?” Overbuilding things the world doesn’t have use for, or is not ready for, typically ends badly. The NASDAQ declined around 70% between the highs of the dot-com boom. That said, one of the most important lessons he has learned over the past three decades is that bubbles can take a long time to burst. 

Now, after looking at so many different arguments from both sides of the aisle, the next question is, “How should we position ourselves in this crazy AI rally?”

Conclusion

To share what Goldman hinted in their report itself – Covello, who is one of their more skeptical analysts, said he recommends remaining invested in AI infrastructure providers. If his skeptical view proves incorrect, these companies will continue to benefit. But even if he’s right, at least they will have generated substantial revenue from the theme that may better position them to adapt and evolve.

On top of that, GS concluded that the AI theme continues to drive the US equity market to new all-time highs, with many AI beneficiaries experiencing large rallies. While AI optimism has pushed valuations for many of the large tech stocks to elevated levels, the valuation of the largest 10 TMT stocks at 31x pales in comparison to the peak of the tech bubble (51x) and late 2021 (43x). More broadly, they believe the AI theme has room to run, with scope for its beneficiaries to broaden as investors look to the next phase of the AI trade, and think this will benefit utilities in particular, due to the energy consumption required in the foreseeable future. 

Our Take on This

As for myself, I’m not the biggest fan of utility companies, that’s why I might not necessarily take a position in them. That said,  I do share a similar opinion regarding the overall market valuation not being in bubble territory. Will they go into a correction from here on? I don’t know. What I know is that there are still plenty of companies that offer attractive risk-reward, even amongst the AI / Technology names. 

Till then, Keep Winning!