Even after a significant rise over the past year (jumping 43% in 2023),… Nasdaq Composite The index is still down about 7% from its record high. While past performance does not necessarily dictate future results, there is a historical relationship between lower interest rates and the stronger performance of growth stocks.
Some analysts expect the Fed to start cutting interest rates this year. Interest rate cuts generally cause bond yields to fall, making it cheaper to borrow money. Such conditions also tend to increase the attractiveness of stocks as an investment vehicle. In addition to the potential for positive valuation catalysts from interest rate cuts, strong demand for companies working in the artificial intelligence (AI) space could fuel strong growth for the Nasdaq in 2024.
In the field of artificial intelligence, no company has a stronger competitive position Nvidia (NVDA -0.20%). If you're aiming to position your portfolio for the next Nasdaq bull market, read on to learn why building a position in a leading AI company is a smart move.
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Nvidia has an unparalleled position in the field of artificial intelligence
Nvidia is a leading provider of high-performance graphics processing units (GPUs). While these hardware technologies were originally used for video games, they have become crucial for artificial intelligence and cloud computing as well. The company currently controls nearly 90% of the high-performance GPU market, and its competitors, which include… Advanced micro devices And Intel Corporation, he would be able to match his techniques anytime soon. As a result, NVIDIA is expected to be one of the biggest winners in the still-nascent AI revolution.
Nvidia has already reported excellent business momentum. Below are some key performance highlights from the third quarter of fiscal year 2024 (for the three months ending October 29, 2023):
- Data center revenues rose 279% year over year to $14.51 billion.
- Total revenue increased 206% year over year to $18.12 billion.
- Gross margin increased to 74%, up from 70.1% in 2Q23 and 53.6% in 3Q2023.
- Non-GAAP (adjusted) EPS rose 593% year over year to $4.02.
Notably, Nvidia has guided for continued excellent growth in the fourth quarter of fiscal 2024. The company's midpoint sales target calls for revenue of about $20 billion — good for annual growth of about 231%. At the same time, the company expects margin expansion to continue – with adjusted gross margin expected to reach 75%. It's also worth noting that Nvidia's guidance has proven to be very conservative over the past year.
Nvidia could still be undervalued
Nvidia shares trade at about 45 times this year's expected earnings. On the face of it, this is a valuation based largely on growth. However, the company's current forward earnings multiple actually comes in much lower than what might normally be expected given how quickly the company is growing its earnings.
NVDA PE Ratio (Forward) Data by YCharts
For comparison, Microsoft It posted earnings growth of 27% year-on-year in the latest quarter and is trading at a forward P/E of 34. Meanwhile, apple Its earnings grew 13% year over year in the last reported quarter and it has a forward P/E of around 28.
Considering that Nvidia has posted such amazing growth, the company's current PE could indicate that the stock is very cheap. Why does the GPU leader trade at a relatively low earnings multiple given its growth? The primary reason is that Nvidia's business has historically been subject to cyclical performance shifts.
But the ongoing AI tailwinds may be underestimated, and the company is taking steps that could limit its exposure to future cyclical downturns. These initiatives revolve around building software components and services that generate reliable recurring revenue streams at consistently high margins.
As a leading provider of GPUs for high-performance computing applications, Nvidia is ideally positioned to build out its data center business. The company is just starting to expand its AI-as-a-service (AIaaS) business, and there's a good chance this initiative will reduce cyclicality and open up new, high-margin sales streams.
The AI leader is on track to be a big winner
Nvidia is still in the early stages of capitalizing on the long-term megatrends associated with the AI revolution and is trading at earnings multiples that look low in the context of its incredible momentum and opportunities.
If the Fed shifts to a policy of significantly lowering interest rates this year and beyond, it is reasonable to expect that investors will become willing to assign more growth-based valuation multiples to stocks. Although there's no guarantee that interest rate cuts and AI will push the Nasdaq to new highs this year, Nvidia stock is a great way to play AI trends.
Long-term investors who build positions in major companies at the forefront of global trends shaping the world are positioning themselves to reap the rewards whenever the next bull market hits. Nvidia certainly fits the bill.
Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Microsoft, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short February 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
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