Sunday, June 23, 2024

The Future of NVIDIA: Post-Split Valuation and Growth Projections

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NVIDIA Corporation (NVDA), a prominent force in the AI and semiconductor technology industries, announced a 10-for-1 forward stock split of the company’s issued common stock during its last earnings release in May. Shareholders of record as of June 6 received nine additional shares for each share held after the close on Friday, June 7. Trading will commence on a split-adjusted basis at market open on June 10.

This strategic move is poised to reshape the landscape for Nvidia investors and the broader tech market.

Post-Split Valuation

NVDA was already a leading AI stock in the market, but investor interest in the chipmaker skyrocketed as its 10-for-1 stock split took effect after the market’s close on June 7. Shares of the hottest stock on the S&P 500 surged tenfold on Friday following its much-anticipated stock split.

Moreover, NVIDIA’s stock has gained more than 158% over the past six months and nearly 222% over the past year. Notably, the stock is up over 3,222% over the past five years. During this remarkable run, Nvidia’s market cap of around $3 trillion surpassed those of Amazon (AMZN) and Alphabet Inc. (GOOGL). Before the 10-for-1 split, the stock traded at a lofty $1,209.

The chip giant’s strategic decision to split its stock follows a broader trend among tech giants to make their stock ownership more affordable and appealing to retail investors. With more individual investors gaining access to Nvidia’s shares post-split, increased trading activity and demand are observed, potentially driving share prices higher.

According to data from BofA research, total returns for companies announcing stock splits are about 25% in the 12 months after a stock split historically versus 12% gains for the S&P 500. Thus, stock splits are seen as a bullish signal, often accompanied by positive investor sentiment and increased buying activity.

Solid Earnings And A Healthy Outlook

The stock split isn’t the only reason for NVDA’s latest bull run. The company also reported better-than-expected revenue and earnings in the fiscal 2025 first quarter, driven by robust demand for its AI chips. During the quarter that ended April 28, 2024, Nvidia’s revenue rose 262% year-over-year to $26.04 billion. That surpassed the consensus revenue estimate of $24.59 billion.

The company’s largest business segment, Data Center, which includes its AI chips and several additional parts required to run big AI servers, reported a record revenue of $22.60 billion, up 427% year-over-year.

“Our data center growth was fueled by strong and accelerating demand for generative AI training and inference on the Hopper platform. Beyond cloud service providers, generative AI has expanded to consumer internet companies, and enterprise, sovereign AI, automotive and healthcare customers, creating multiple multibillion-dollar vertical markets,” said Jensen Huang, founder and CEO of NVDA.

“We are poised for our next wave of growth. The Blackwell platform is in full production and forms the foundation for trillion-parameter-scale generative AI,” Huang added. During a call with analysts, the CEO mentioned that there would be significant Blackwell revenue this year and that the new chip would be deployed in data centers by the fourth quarter.

The chipmaker’s non-GAAP gross profit grew 328.2% from the previous year’s quarter to $20.56 billion. NVDA’s non-GAAP operating income was $18.06 billion, an increase of 491.7% year-over-year. Its non-GAAP net income rose 461.7% year-over-year to $15.24 billion. Also, it posted a non-GAAP EPS of $6.12, compared to analysts’ estimate of $5.58, and up 461.5% year-over-year.

Furthermore, NVIDIA’s cash, cash equivalents and marketable securities were $31.44 billion as of April 28, 2024, compared to $25.98 billion as of January 28, 2024.

According to its outlook for the second quarter of 2025, the company expects revenue to be $28 billion, plus or minus 2%. Its non-GAAP gross margin is expected to be 75.5%, plus or minus 50 basis points. NVDA’s non-GAAP operating expenses are anticipated to be approximately $2.8 billion.

Raised Dividends

NVDA raised its dividend payouts to reward shareholders and demonstrate confidence in its financial strength and growth prospects. The company increased its quarterly cash dividend by 150% from $0.04 per share to $0.10 per share of common stock. The dividend is equivalent to $0.01 per share on a post-split basis and will be paid on June 28 to all shareholders of record on June 11.

While Nvidia’s dividend yield is modest compared to its tech peers, its considerable cash flow and strong balance sheet provide ample room for growth.

Dominance in AI and Data Center Markets Fuels Unprecedented Growth Opportunities

NVDA is strategically positioned at the forefront of the AI and data center markets, with a high demand for AI chips for data processing, training, and inference from large cloud service providers, GPU-specialized ones, enterprise software, and consumer internet companies. In addition, vertical industries, led by automotive, financial services, and healthcare, drive the demand.

Statista projects the generative AI (GenAI) market to reach $36.06 billion in 2024, with the U.S. accounting for the largest market size of $11.66 billion. Further, the GenAI market is expected to total $356.10 billion by 2030, expanding at a CAGR of 46.5% from 2024 to 2030.

Over the past year, Nvidia has experienced a significant surge in sales due to robust demand from tech giants like Google, Microsoft Corporation (MSFT), Meta Platforms, Inc. (META), Amazon, and OpenAI, who invested billions of dollars in Nvidia’s advanced GPUs essential for developing and deploying AI applications. In January, META announced a sizable order of 350,000 high-end H100 graphics cards from Nvidia.

As a result, NVDA holds a market share of about 92% in the data center GPU market for generative AI applications.

Bottom Line

NVDA’s recent 10-for-1 stock split has significantly impacted its valuation and market appeal. This strategic move not only made Nvidia’s shares more accessible to retail investors but also fueled increased trading activity and demand, driving share prices higher. The stock surged tenfold on Friday when the stock split took effect, reflecting the heightened investor interest.

NVIDIA’s strong financial performance, as evidenced by the fiscal 2025 first quarter report, further solidifies its position in the AI and data center market. The company reported threefold revenue growth, driven by the massive demand for its AI processors from major tech companies, including Microsoft, Meta, Amazon, Google, and OpenAI.

The chipmaker’s remarkable growth has propelled it to the third-largest market capitalization globally, surpassing peers such as AMZN and META.

Further, the company’s revenue and EPS for the fiscal year ending January 2025 are expected to grow 97.9% and 108.9% year-over-year to $120.55 billion and $27.07, respectively. For the fiscal year 2026, Analysts expect its revenue and EPS to increase 32.4% and 32.6% from the prior year to $159.55 billion and $35.90, respectively. With a healthy outlook for the future, NVDA continues to attract investors looking for long-term growth opportunities.

Moreover, the recent decision to raise dividends by 150% showcases NVDA’s confidence in its financial strength and growth prospects, making it more attractive to income-oriented investors. This move, coupled with the stock split, appeals to different investor demographics and reflects NVDA’s commitment to rewarding shareholders while positioning itself for future growth in the AI and semiconductor sectors.

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