In 2023, there were few better stocks to own than Nvidia (NASDAQ: NVDA). The stock rose nearly 240%, and many investors (including myself) concluded that 2024 wouldn’t be a repeat of the same. But we were wrong.
On the heels of an incredible 2023 performance, Nvidia more than doubled in 2024, as the stock has risen 170% so far. That’s an amazing run that is incomparable when you consider Nvidia’s size.
But after such a strong year, could Nvidia double again from this point? After all, it proved investors wrong multiple times.
Artificial intelligence is driving Nvidia’s stock higher
Nvidia’s rise has been tied to the artificial intelligence (AI) gold rush. To train AI models, you need some serious computing power. Central processing units (CPU) inside PCs don’t cut it because it can only process one calculation at a time. In place of CPUs, graphics processing units (GPUs) are used.
GPUs can perform multiple calculations in parallel, which is key for arduous workloads. Additionally, GPUs can be connected to create incredibly powerful computers that can crank out state-of-the-art AI models in no time.
With many companies building servers outfitted with thousands of GPUs, Nvidia stands to benefit.
While there are a few competitors in the GPU market, none compare to Nvidia. As a result, Nvidia has an iron grip on this market, as anyone building a supercomputer to train AI models is likely an Nvidia customer.
This has caused its sales to skyrocket, with Nvidia posting multiple quarters of revenue tripling.
It also achieved record profitability alongside its revenue growth for a few reasons. First, it can charge what it wants with a best-in-class product that is light-years ahead of the competition. Second, it already has the production capacity to produce these GPUs. And finally, it doesn’t need to to spend on marketing because the demand is already in place.
These factors combine to give Nvidia the best chance at peak margins, which it posted recently.
As a result of Nvidia’s success, investors are been willing to pay a substantial premium to own the stock. It trades at 46 times forward earnings, which indicates investors are willing to pay up for Nvidia’s future growth, which has already been penciled in.
All this information was known entering 2024, yet the market still bid up the stock throughout the year. With that in mind, could Nvidia double by the end of 2024?
If the stock doubled, many records would be broken
It would be unreal for Nvidia to double by the end of 2024. While there’s no doubt Nvidia’s business will succeed throughout 2024 and beyond, there are questions about the stock.
Currently, Nvidia is valued at $3.1 trillion. If it doubles, that means it would be worth $6.2 trillion. No company has ever been worth $4 trillion, so many records would need to be shattered between now and the end of the year for this to occur.
Furthermore, the stock’s valuation would have to practically double as well. Although Nvidia has steadily blown expectations out of the water, aggressive growth is still penciled into the stock, and these expectations won’t decrease. So, for Nvidia to double, it would likely have to trade at more than 80 times forward earnings.
Few fully profitable companies have sustainably traded above 40 times earnings in the history of the stock market, let alone 80. As a result, I don’t think expecting the stock to double is feasible.
While Nvidia has been a superstar over the past year and a half, I don’t think it’s wise for investors to expect the stock to double anytime soon. Too many barriers are in the way of the numbers that would need to be baked into the stock to achieve a double by the end of 2024.
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Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Nvidia’s Stock Is Up 170% to Start 2024. Could It Double to Finish the Year? was originally published by The Motley Fool
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