Nasdaq 100 Outlook: No stopping the AI rally for NVIDIA stock
• NVIDIA shares up 25% after its first quarter results and outlook smashed expectations
• The beat is being driven by unprecedented demand for artificial intelligence chips
• Brokers wowed by the results, leading price targets higher toward $500
• NVIDIA now on course to hit $1 trillion valuation
• But NVIDIA’s valuation is still bloated and sat twice as high as the industry average
NVIDIA shares are up 25% - yes, 25%! – in premarket trade today, putting the chipmaker on course to open at all-time record highs after the eruption of interest in artificial intelligence allowed it to beat estimates in the latest quarter and post a rosy outlook that blew forecasts out of the water.
The stock is now in uncharted waters considering how far above it has moved from the previous all-time high of $335 we saw back in November 2021. That could leave it vulnerable to a fall back toward this level if it comes under renewed pressure. A severe reversal could see it fall back toward the ceiling that has held the stock back this month at $317.
Let’s have a look at what is causing this unprecedented rally to continue today…
Revenue was down 13% from the year before in the first quarter at $7.19 billion, but that came in much higher than the $6.5 billion forecast by Wall Street. Plus, sales climbed 19% sequentially from the previous quarter as more AI demand filtered through.
NVIDIA’s core business is supplying chips and GPUs for datacentres that power digital services. Datacentre revenue was up 14% from last year and hit a new record high of $4.3 billion. That was much better than the $3.9 billion forecast and marked the first acceleration in year-on-year growth in a year. The beat came down to increased demand for AI applications, with NVIDIA having introduced a wave of products and services during the quarter.
‘We’re seeing incredible orders to retool the world’s datacentres,’ said CEO and founder Jensen Huang. He said that $1 trillion of datacentre infrastructure will need to be upgraded to be able to handle accelerated computing needed for AI. ‘The budget of a datacentre will shift very strongly to accelerated computing’.
It wasn’t all good news as its gaming division that supplies chips used in computers and consoles reported revenue of $2.2 billion. That was down 38% from the year before and marked the fourth consecutive quarter of lower year-on-year growth. Still, that was a milder fall than anticipated considering analysts had forecast revenue to slump to $1.9 billion.
Adjusted EPS was down 20% from last year at $1.09, but that was also a much milder decline than anticipated and smashed past the $0.92 forecast.
NVIDIA outlook blows estimates out of the water
NVIDIA’s outlook was also hugely impressive, with the chipmaker aiming to generate $11 billion of sales in the second quarter. Wall Street had only forecast $7.1 billion!
Huang said it saw demand spike for AI chips in January and this prompted it to place additional orders, stating it has ‘substantially more supply for the second half’ of 2023 to suggest the momentum will be even greater going forward. That means markets are now more confident than ever that AI can provide a major new catalyst for the datacentre division considering analysts believe revenue growth will accelerate significantly by jumping over 43% in the current quarter.
Plus, gaming sales are expected to return to growth for the first time in over a year in the second quarter.
The results led to many open mouths on Wall Street, with brokers amazed by the momentum that AI is providing only a few short months after the race for AI supremacy kicked off. Here is what some brokers had to say after the update:
• Keybanc Capital Markets said NVIDIA’s results lived up to the hype around AI as it bumped-up its target price to $500 from $375 and reiterated its Buy rating.
• Bloomberg Intelligence said the reaction to the results is ‘unheard of in the sector’.
• Barclays said markets had expected the datacentre business to start delivering faster topline growth but said this has happened at least a quarter earlier than expected, describing the performance as ‘extraordinary’ in magnitude. It is Overweight on NVIDIA and hiked its target price to $500 from just $275.
• Piper Sandler said the influx of AI orders was ‘unprecedented’. It is also Overweight and raised its price target to $440 from $400.
• Jefferies said NVIDIA’s datacentre business is now generating more revenue than Intel and AMD’s combined CPU sales for the first time ever, describing it as ‘the fourth tectonic shift to a parallel processing era’. It increased its target price to $472 from $300 and kept its Buy rating.
• Several other brokers also raised their target price on NVIDIA today, including JPMorgan to $500 from $250, Bernstein to $475 from $300 and Evercore ISI to $500 from $320
If today’s move is sustained then it will add almost $190 billion to NVIDIA’s valuation, taking it to over $955 billion and putting it within reach of the $1 trillion threshold! The stock is now up a staggering 166% since the start of 2023, making it by far the best performer in the S&P 500.
Although its outlook has improved markedly thanks to AI, the staggering rise in value this year means NVIDIA is still touting a very bloated valuation that has already baked-in a lot of the new potential coming from the new breakthrough technology.
Based on adjusted EPS forecasts for the current financial year, NVIDIA trades at a price-to-earnings ratio of 65.0x! That is more than double the industry average.
A number of other stocks that are expected to benefit from AI are also pushing higher this morning in wake of the NVIDIA update. This includes other rival chipmaker AMD, which is up 8.9% today.
Big Tech players like Microsoft and Alphabet, which are driving the increased demand for AI tools, are up 1.8% to 2% this morning.
Other smaller AI companies are also benefiting, with Palantir up 7.5%, Soundhound up 6.7%, Guardforce up 12.9%, Bigbear up 7.5% and C3.ai trading 8.8% higher.
Nasdaq 100 Analysis: Where next for NDX?
NVIDIA is one of the largest single components of the Nasdaq 100, making up over 5.5% of the index. Many of the stocks that are also gaining ground today thanks to the NVIDIA earnings, such as Alphabet and Microsoft, boast even bigger weightings.
With that in mind, NVIDIA is the driving force behind the 1.8% rise in Nasdaq 100 futures today. The index is now testing the 9-month closing high of 13,849 hit on Monday. The RSI is no longer in overbought territory to keep hopes alive that there is some more upside. A break above here would bring 14,300 back into view, a level not seen for over a year.
On the downside, we would need to see a slip below 13,200 before the key psychological level of 13,000 comes back into play.
NVIDIA released earnings after markets closed yesterday and most traders must wait until they reopen the before being able to trade. But by then, the news has already been digested and the instant reaction in share price has happened in after-hours trading. To react immediately, traders should take their positions in pre-and post-market sessions.
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