Nvidia’s (NASDAQ:NVDA) up an impressive 29% over the past year. Despite concerns the company’s too large to offer further growth potential, there are several reasons to believe Nvidia stock can continue to deliver decent returns to investors.
If someone put in £5k today, here’s what it could be worth come the end of the year.
Still potential to rally
The biggest reason for my optimism is demand. The world’s largest technology companies are still investing heavily in AI infrastructure, and Nvidia remains the clear market leader in this space.
It seems like almost every week, a new AI spending deal is announced, with a recent focus on data centre spending. Much of that investment ultimately translates into demand for Nvidia’s chips.
So as long as hyperscalers continue expanding their AI capacity throughout this year, Nvidia appears well-positioned to capture a significant share of that spending.
That spending then filters down to revenue and profit. The Q1 earnings report showed data centre revenue drove this growth, surging 92% versus the same period last year to $75.2bn.
This helped Nvidia’s overall business post record revenues of $81.6bn, representing an 85% year-on-year increase. So it’s clear that even though the company’s large, the pace of growth is still strong.
Translating growth to stock forecasts
The current Nvidia price-to-earnings (P/E) ratio’s 37.21. For the Nasdaq, the index average P/E ratio’s 31.89. Therefore, the argument that Nvidia can’t appreciate in value because it’s overvalued doesn’t really stack up. Sure, it’s not super-cheap. But we’re not talking about a company with a crazy P/E ratio of 100.
From the current price of $210, I think the stock will be able to reach back to the year-to-date highs around $225 before year-end and potentially push to $250 if financial updates between now and then show similar growth to what was indicated in the Q1 results.
Further, if overall sentiment around AI remains positive, that would also help to support the stock.
Risks to the view
Competition is the main risk I see to my view. For example, Advanced Micro Devices continues to improve its AI offer, while other companies are developing their own custom chips.
This could reduce dependence on Nvidia for certain workloads. At the same time, export restrictions affecting sales to China remain an ongoing uncertainty that could weigh on revenue growth.
Even with these concerns, I believe $225-$250 is a reasonable range for the stock to finish year-end at. If this were the case, it could turn £5k into as much as £5,950.
Obviously, this isn’t guaranteed, with the potential for the £5k to be worth less than that come December. But it certainly shows what could be possible and that it’s worth considering.
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Jon Smith does not hold any positions in the companies mentioned
