Nvidia Stock Rises for 10 Consecutive Days: What's the Growth Ceiling Amidst the AI Computing Power Shortage?

Nvidia produces graphics processing units (GPUs) and the related systems that allow for their large-scale functionality. GPUs were initially created for high-end gaming graphics, but they have since found new homes in engineering simulations, drug development, and cryptocurrency mining (any application requiring extreme parallel computing). 

The largest use case for GPUs currently is for AI training and inference in massive data centers, and yet the industry has not identified a definitive peak in the demand for AI compute capabilities. 

Nvidia estimates that total global capital expenditure on data centers could exceed $3 trillion to $4 trillion by 2030 – incredible growth over a relatively short time frame, which will provide manufacturers of compute products an unprecedented opportunity to supply to that buildout. In its most recent quarter report, Nvidia generated 73% year-on-year revenue growth and Wall Street anticipates another 79% revenue growth in the next reporting quarter and 85% growth in the following quarter. 

While it’s rare to see a company this large continue to accelerate after several years of large growth, it is this trend that is a common theme in conversations regarding Nvidia stock.

When looking at trailing earnings of 38x, the reported EPS may give the impression of an extremely high valuation. 

But adding current growth and estimating forward earnings results in better than 22x (forward) P/E multiples. 

The difference between these two multiples indicates that the marketplace is unwilling to value the business beyond one year of growth, despite the clear extended growth pattern evidenced by multiple managements and customers with respect to their investment plans related to AI. 

Therefore, if the long-term investor believes that results can exceed 2026, then, from a valuation perspective, the current price is below where it is priced at today based on trailing earnings. If Nvidia executes through this period, today's price would be less than what it indicates based on a straightforward 38-times trailing reference multiple.

Nvidia stock has found itself in the doldrums over the last few months as capital moved into other AI names that carry more near-term risk, and into high-yield sectors such as consumer staples. 

According to Jamie Meyers at Laffer Tengler Investments, investors are beginning to return to a more realistic view of their portfolios following the earlier year’s market’s decision to trim some of its winning stocks based on concerns around the impending tech trade slowdown. In this regard, he believes that growth is still heavily concentrated in AI-related sectors. 

Meyers explains that until last week, the equity pricing was in a lull due to the lack of anything that could act as a catalyst for returning share prices to prior levels.

He uses Nvidia’s roadmap as an example and notes, "Because their roadmap is so well-known, there really isn't anything new for investors and the frequent new product deliveries that occur give further weight to Meyers' assessment of Nvidia’s continued "astronomical" growth."

Also, Gil Luria of D.A. Davidson says investors are becoming "increasingly bullish" regarding AI direction as they have pushed out their respective plans to spend, resulting in more capital flowing into semiconductor companies as they continue to build data centres. The recent 10-day rally in Nvidia stock is the first one of this length from Q4 2023 to present and demonstrates the return to offensive investment strategies and the restoration of faith in the AI sector overall.

According to Dow Jones Market Data, Advanced Micro Devices (AMD) achieved its first 10-day winning streak since May 2005, with a gain of 30.11% for the period.

Intel (INTC) was down 2.14% on the same day after having experienced its longest period of recent success (for the nine days ending on that Tuesday) in terms of both daily price movement and total return (a cumulative increase of 58.29% during the period) in its history. 

Andrew Rocco, analyst at Zacks Investment Research, pointed out that the decline in Intel was simply due to profit-taking after the rapid ascent of this stock (which had been a concern to some investors because of the perception that it has fallen behind the competition in terms of its ability to develop innovative technologies that can take advantage of AI). 

Andrew still believes that both Intel and AMD (as well as Nvidia) will continue to benefit from the ongoing AI infrastructure buildout over the intermediate term. Andrew also states that the rise of agentic/embodied artificial intelligence will require very large quantities of computational resources, which may support future earnings growth for both Intel and AMD as these types of applications become more mature.

Nvidia's core elements of market strength include capacity, product cycle timing, and ongoing investment by its customers. 

With global data center capital expenditures expected to reach somewhere between $3 trillion and 4 trillion by 2030 and with artificial intelligence workloads transitioning from training massive models to developing more inference-based, agent-like workloads, the high levels of compute intensity should continue. 

The upcoming aspects of Nvidia's well-publicized product roadmap will provide the company's customers with both an opportunity for fewer surprises in terms of headline-driven spikes in headcount, yet the customers also will have advanced insight for their planning of multi-quarter or multi-year deployments. 

Continuing frequent updates of product configurations will help maintain Nvidia's performance leadership in the marketplace, and the quick pace at which Nvidia has been expanding shipments into AI clusters indicates that the company is still relatively far from satisfaction with regard to demand for their product.

What's the biggest question that hasn't been answered: Does AI matter? 

The bigger question is when will spending ramp and by how much, when will the spending last for more than one quarter, and will there be a slowdown in spending around the year 2030 based on projected estimates from different players? 

There is also the risk of hyperscalers entering a digestion period over a number of quarters after heavy buildouts, which can also lead to increased volatility. 

The market's nature to only price in a year of growth at a time has the potential to greatly affect the company's multiples if the quarterly data points are not meeting or exceeding expectations. The potential for additional competitors is also currently in question, as AMD has now introduced a greater data center GPU offering and Intel has changed direction by pursuing a foundry/accelerator strategy. 

Following a 1,100% increase in share price since the beginning of the Year 2023 and a large move over a 10-day period that pushed the price of NVIDIA shares higher by almost 19%, expectations in the shorter term are very high and may cause market participants to respond more dramatically to changes in forecasts or changes in macroeconomic news.

Despite these risks, two items have drawn investors again. 

First, the fundamentals are still very good; this last quarter was 73% growth, with the expectations for future quarters to be 79% and 85%, which is unusual at this size and scale. 

Second, the valuation of these stocks is now less extended based upon forward earnings, and many large institutions are beginning to move away from the 'defensive' perspective on AI to the 'offensive' perspective now that they see AI as the primary growth engine for the market. 

Luria states that there is an influx of capital into semiconductor manufacturers, which will benefit from increased spending associated with building data centers. This type of capital investment creates upper-end revenue visibility for those vendors who supply components. 

The success of Nvidia has been correlated with their recent successful launch of new products but is on equal par with the restoration of market momentum for AI as a capital medium-cycle opportunity.