Thursday, 14 December 2023
by Rose White
The “Magnificent Seven,” a select group of the world’s largest technology companies, has been the story of Wall Street this year. These stocks have seen gains of between 50% and 219% since in 2023.
Such gains aren’t typical for stocks, especially those that are already among the largest market cap companies on the planet. It’s fair to wonder whether the party will end in 2024.
Unfortunately, these types of gains probably won’t go on forever. However, there could be one exception, one of the “Magnificent Seven” that’s just getting started.
If you’re unfamiliar with the Magnificent Seven, they are Nvidia (NASDAQ: NVDA), Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL), Meta Platforms (NASDAQ: META), and Tesla (NASDAQ: TSLA). They are not only leaders in their fields but have massive revenue and profits, are trusted brands, and have the attention of investors and consumers.
It’s been a great year if you’ve been holding these stocks. The most popular stocks don’t always perform well, but 2023 was an extraordinary year.
Investors must always put things in context, and this is no exception. While these stocks have gone to the metaphorical moon, their valuations have mostly followed. Their forward price-to-earnings ratios have risen by as much as 160%, except for one.
Chip company Nvidia’s forward earnings valuation actually fell despite its massive share price growth this year. That’s because Nvidia is at the front of a generational growth opportunity, similar to what the internet or cloud technology did for the modern economy.
Nvidia emerged as a force in artificial intelligence (AI). AI models require a ton of computing power to process immense amounts of data quickly. The hardware that provides that power is what allows users to type complex questions into large language models like ChatGPT and get detailed answers in seconds. Nvidia specializes in chips designed for these high-compute workloads.
Analysts estimate that it has a market share of between 70% and 95% in that slice of the chip market, dominating an industry with billions of dollars of investment pouring in. That shows up in Nvidia’s financials, too, where its revenue growth has taken off in 2023.
This could only be the beginning. Lisa Su, CEO of rival Advanced Micro Devices, has predicted the AI chip market will balloon to over $400 billion in the coming years. Researchers at Statista believe the global AI market opportunity will be worth as much as $2 trillion by 2030.
Even if AMD and other competitors chip away at Nvidia’s market share, the growth of the pie could offset a lot of what they take from it. Remember, Nvidia’s companywide revenue is at $45 billion today. A $400 billion chip market that Nvidia dominates should translate to years of revenue growth.
If these predictions are remotely accurate, you can make the case that Nvidia is still cheap today. Analysts believe Nvidia’s earnings per share will come in at around $12.29 for the year. That gives it a price-to-earnings ratio of 38.
Growth expectations rocketed higher as Nvidia’s growth accelerated and showed the impact AI could have on its business.
For a business growing earnings at 39%, a price-to-earnings ratio of 38 is a fine valuation. There are risks, in that Nvidia must live up to these high expectations. The stock has also risen by more than 200% since January, and any stock on that kind of a tear can cool off, so investors should expect some volatility.
But when all is said and done, AI would have to be a complete fluke for the long-term trend to point anywhere but up. Nvidia controls most of the market’s AI chips, the building blocks of this new technology. That’s a great driver’s seat for the company and an opportunity for investors to ride Nvidia higher.
Should you invest $1,000 in Nvidia right now?
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.