Even after a big rally last year (up 43% in 2023). Nasdaq Composite The index is still about 7% below its record high. Although past performance does not necessarily impact future results, there is a historical correlation between lower interest rates and stronger performance of growth stocks.
Some analysts expect the Federal Reserve to begin cutting interest rates later this year. Interest rate cuts typically result in lower bond yields, making it cheaper to borrow. 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 artificial intelligence (AI) companies could drive continued strong growth for the Nasdaq in 2024.
In the AI space, no company has a stronger competitive position than Nvidia (NVDA -0.20%). If you're looking to position your portfolio for the next Nasdaq bull market, read on to learn why building a position in this AI leader is a smart move.
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Nvidia has an unparalleled position in AI
Nvidia is the leading provider of high-performance graphics processing units (GPUs). While these hardware technologies were originally used for video games, they have also become crucial for AI and cloud computing. The company currently controls about 90% of the high-performance GPU market, and it seems like its competitors, which include, are unaffected modern micro devices And Intel, will be able to keep up with its technologies in the foreseeable future. Therefore, Nvidia is likely to be one of the biggest winners in the nascent AI revolution.
Nvidia has already reported excellent business momentum. Here are some key performance items from the third quarter of fiscal 2024 (for the three months ended October 29, 2023):
- Data center revenue increased 279% year-over-year to $14.51 billion.
- Total revenue increased 206% year-over-year to $18.12 billion.
- Gross margin increased to 74%, compared to 70.1% in the second quarter of 2023 and 53.6% in the third quarter of 2023.
- Non-GAAP (adjusted) earnings per share increased 593% year-over-year to $4.02.
In particular, Nvidia expects its outstanding growth to continue in the fourth quarter of fiscal 2024. The company's median sales target calls for sales of around $20 billion – representing annual growth of around 231%. Meanwhile, the company expects further margin expansion – the adjusted gross margin is expected to rise to up to 75%. It's also worth mentioning that Nvidia's forecast turned out to be very conservative last year.
Nvidia could still be severely undervalued
Nvidia stock trades at about 45 times this year's expected earnings. At first glance, this is a valuation that is heavily dependent on growth. However, the company's current earnings multiple is actually far lower than one would normally expect, given how quickly the company is growing its earnings.
NVDA PE Ratio (Forward) data from YCharts
For comparison, Microsoft reported 27% year-over-year earnings growth in its most recent quarter and trades at a forward P/E ratio of 34. Apple increased earnings by 13% year-over-year in the last reported quarter and has a forward P/E ratio of around 28.
Given that Nvidia is experiencing such incredible growth, the company's current P/E ratio could indicate that the stock is quite cheap. Given its growth, why is the GPU market leader trading at such a comparatively low earnings multiple? The main reason for this is that Nvidia's business has historically been susceptible to cyclical performance fluctuations.
However, the ongoing tailwind from AI may be underestimated, and the company is taking steps that could limit its exposure to future cyclical downturns. These initiatives involve developing software and service components that generate reliable, recurring revenue streams with consistently high margins.
As a leading provider of GPUs for high-performance computing applications, Nvidia is perfectly positioned to build its own data center business. The company has just started expanding 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 channels.
The AI market leader is well on its way to becoming a big winner
Nvidia is still in the early stages of capitalizing on massive long-term trends related to the AI revolution and is trading on earnings metrics that appear low given the company's incredible momentum and opportunity.
If the Fed moves toward a policy of significant interest rate cuts this year and beyond, investors may be willing to assign significantly more growth-sensitive valuation metrics to stocks. While 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 capitalize on AI trends.
Long-term investors who build positions in top companies at the forefront of world-defining trends will be positioned to reap the rewards when the next bull market hits. Nvidia definitely 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.