Deep Dive: Can Nvidia keep growing so quickly? Here’s what Wall Street thinks.


Nvidia is a phenomenon. The question for investors is whether or not it is too late to load up on the company’s shares. Does this sound familiar? It should, in light of the history of Tesla’s sales growth after it introduced the Model 3 in 2017. Then again, Nvidia’s story is different, as the purchase of its expensive graphics processing units (GPU) supports a broad array of industries that are upgrading systems to roll out artificial intelligence technology.

Below we screen the semiconductor manufacturing space for expected sales growth rates through 2025. But first, it may be interesting to take a look at what appears to be a high valuation for Nvidia’s shares, and consider how well supported the valuation is by profit margins.

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To set the stage, Nvidia reported sales of $13.5 billion for the second quarter of its fiscal 2024, ended July 30, which was an 88% increase from the previous quarter and a 101% increase from a year earlier. The company’s own guidance had been for $11 billion in sales for the July 30 quarter, which would have been a 53% sequential increase. For next quarter, Nvidia CFO Colette Kress expects sales of roughly $16 billion, which would be a 19% sequential increase and a 170% increase from $5.93 billion in the third quarter of the company’s Fiscal 2023, which ended Oct. 31, 2022.

Read: Nvidia’s jaw-dropping revenue forecast might not even be its peak

Nvidia’s valuation compared with those of the S&P 500 and Tesla

By traditional measures, Nvidia Corp.’s NVDA, +3.06% stock is expensive. The shares closed at $471.16 Tuesday, up 222% for 2023, excluding dividends. Based on that price, the stock traded for 34.3 times the consensus earnings estimate for the next 12 months among analysts polled by FactSet (these estimates were provided by FactSet early on Wednesday). The stock was trading for 19.6 times the consensus sales estimate for the next 12 months.

In comparison, the forward price-to-earnings ratio for the S&P 500 SPX was 18.6 and the index’s forward price-to-sales estimate was 2.3 at the close on Tuesday.

For starters, Nvidia’s forward P/E of 34.3 may not seem outrageously high for a rapidly growing technology company. And that P/E is less than twice the company’s forward price-to-sales ratio, while the S&P 500’s P/E is more than eight times its price/sales ratio. That underscores how profitable Nvidia has become.

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For its most recent reported quarter Nvidia’s gross margin was 70.93%, improving from an already impressive 43.48% a year earlier, according to FactSet. The company’s operating margin for the quarter was 54.06%, up from 13.08% a year earlier. The S&P 500’s second-quarter gross margin was a weighted 32.68%, narrowing from 33.32% a year earlier, while its operating margin was 14.71%, down from 15.71% a year earlier, according to FactSet.

A company’s gross margin is its net sales, less the cost of goods or services sold, divided by sales. Net sales are sales minus returns and discounts, such as coupons. The cost of goods or services sold includes the actual costs for making the items or providing the services, including labor.

A company’s operating margin is its earnings before interest, taxes, depreciation and amortization (EBITDA) divided by sales.

In the case of Nividia, the high gross margin underscores the company’s pricing power, as its founder and CEO Jensen Huang emphasized in its earnings press release Tuesday afternoon.

“During the quarter, major cloud service providers announced massive NVIDIA H100 AI infrastructures,” with partnerships to bring Nvidia’s AI technology “to every industry,” Huang said.

Here’s a link to additional commentary about Nvidia’s quarterly performance from Kress.

Getting back to valuations, Tesla Inc. TSLA, -2.71% remains a fast grower with second-quarter revenue up 47% from a year earlier. The stock trades at a forward P/E of 55.4 and a forward price-to-sales ratio of 6.3. So P/E is higher and price-to-sales is much lower than the corresponding ratios for Nvidia. Why? It is not only the slower sales growth rate.

Tesla’s gross margin for the second quarter was 18.19%, narrowing from 25% a year earlier. That shows the effect of the company’s decision to lower prices for its electric vehicles drastically. And it is considerably lower than the S&P 500’s gross margin, above, not to mention Nvidia’s. Tesla’s operating margin narrowed to 14.25% in the second quarter from 20.83% a year earlier. Its most recent operating margin sure looks good for a car manufacturer, but it isn’t very impressive if you consider Tesla to be a cutting-edge technology company.

Screening chip makers for sales growth expectations

For a broad screen of semiconductor manufacturers and companies that make equipment they use or provide related services, we began with the 30 companies held by the iShares Semiconductor ETF SOXX, which tracks the PHLX Semiconductor Index SOX. Then we added the 30 additional companies in the S&P 1500 Composite Index XX:SP1500 in the semiconductor industry, as determined by FactSet, or in the “Semiconductors and Semiconductor Equipment” Global Industry Classification Standard (GICS) group. (The S&P 1500 Composite is made up of the S&P 500, the S&P 400 Mid Cap Index MID and the S&P Small Cap 600 Index SML ).

While this list will exclude some of the newest or smallest industry players, it provides a reasonable point from which to look at sales estimates for the next few years, because S&P Global’s criteria for initial inclusion in the S&P Small Cap 600 Index includes positive earnings for the most recent quarter and for the sum of the most recent four quarters.

To compare the companies by expected sales-growth rates, we looked at consensus calendar year estimates among analysts polled by FactSet. We used calendar years for uniform comparisons because many companies have fiscal years that don’t match the calendar.

For Nvidia, we can look out to calendar 2026 and see that the consensus estimate is for the company’s sales to climb to $101 billion. That would make for a three-year compound annual growth rate (CAGR) of 27.5% from the consensus estimate of $48.72 billion in sales for calendar 2023.

But for most of our group of 60 semiconductor companies, including most of the top 10 players by market capitalization, sales estimates are only available through calendar 2025. On this basis, Nvidia’s two-year CAGR would be 31.3%, based on the consensus sales estimate of $84.01 billion for 2025.

Among the 60 semiconductor companies, consensus sales estimates are available through 2025 for 48 of them. Here are the 20 for which analysts expect to see the highest sales CAGR from calendar 2023 baselines. Annual sales estimates are in millions of U.S. dollars.

Company Ticker Two-year estimated sales CAGR through 2025 Est. 2023 sales Est. 2024 sales Est. 2025 sales Forward P/E Forward price/ sales
Wolfspeed Inc. WOLF, -1.82% 34.9% $955 $1,240 $1,737 N/A 5.6
Nvidia Corp. NVDA, +3.06% 31.3% $48,722 $71,187 $84,011 34.3 19.6
SiTime Corp. SITM, -0.48% 30.7% $146 $201 $249 150.3 16.0
First Solar Inc. FSLR, -1.72% 27.2% $3,537 $4,688 $5,725 16.4 4.5
Enphase Energy Inc. ENPH, -4.00% 22.7% $2,699 $3,182 $4,063 21.5 5.9
SolarEdge Technologies Inc. SEDG, -2.84% 21.1% $3,846 $4,613 $5,636 15.7 2.2
Rambus Inc. RMBS, -0.57% 19.9% $563 $667 $809 28.0 9.7
Teradyne Inc. TER, -0.07% 19.9% $2,680 $3,267 $3,852 26.7 5.3
Taiwan Semiconductor Manufacturing Co. Ltd. ADR TSM, -0.31% 19.5% $67,413 $81,588 $96,232 17.1 6.0
Universal Display Corp. OLED, -1.08% 17.9% $583 $694 $811 32.9 11.0
Power Integrations Inc. POWI, -1.81% 17.6% $499 $598 $690 38.6 8.6
Advanced Micro Devices Inc. AMD, -4.04% 17.2% $22,869 $27,534 $31,413 29.8 6.8
Ceva Inc. CEVA, -0.33% 16.5% $111 $126 $150 62.4 4.2
Ichor Holdings Ltd. ICHR, -0.58% 16.5% $804 $929 $1,091 32.7 1.1
Monolithic Power Systems Inc. MPWR, -1.15% 15.6% $1,820 $2,081 $2,432 41.0 12.5
Ultra Clean Holdings Inc. UCTT, -1.13% 15.0% $1,719 $1,946 $2,274 22.9 0.8
Cohu Inc. COHU, -1.02% 15.0% $655 $737 $866 16.4 2.4
Marvell Technology Inc. MRVL, -2.76% 14.4% $5,542 $6,362 $7,249 31.3 8.8
Onto Innovation Inc. ONTO, +3.11% 14.4% $820 $931 $1,073 27.4 6.5
United Microelectronics Corp. ADR UMC, +0.15% 14.1% $7,071 $8,062 $9,208 9.3 2.2
Source: FactSet

Click on the tickers for more about each company, including more estimates, ratings summaries and consensus price targets.

Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

Nvidia ranks second, which is notable because the company that tops the list, Wolfspeed Inc. WOLF, -1.82%, is expected to have annual sales of less than $1 billion for calendar 2023. There is no P/E for this company on the table because it isn’t expected to achieve profitability until the third quarter of calendar 2025.

Don’t miss: The S&P 500 is overweight to big tech. Moving some money to this highly rated fund can diversify your portfolio.

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