Nvidia Corp. (NASDAQ:NVDA) continues to dominate the artificial intelligence market, establishing itself as the “industry de facto standard,” with no signs of this paradigm changing in the near future, according to Goldman Sachs.
Analyst Toshiya Hari has reaffirmed his bullish stance on the chipmaking giant in a note published Monday. Hari bolstered his belief in the “sustainability of the ongoing Gen AI spending cycle” and Nvidia's ability to maintain its leadership position through “consistent and rapid innovation across Compute, Networking, and Software” after a positive meeting with Nvidia’s CFO, Colette Kress.
Customer ROI and Capex trajectory
The sharp increase in hyperscale AI capital expenditures (capex) over the past 18 months raises investor concerns about sustainability of such a growth pace.
While the debate on Gen AI's adoption pace persists, and a cyclical correction is expected, recent comparisons of the Gen AI cycle with past Compute build cycles offer some reassurance, according to Goldman Sachs.
Kress has highlighted that data center space, power, and cooling concerns “are unlikely to derail the company’s growth trajectory for the foreseeable future.”
Evolution of Gen AI Models
Kress discussed the anticipated evolution of Gen AI models over the medium to long term. She expects a blend of models, including those exceeding current models in complexity, such as multi-trillion parameter models, as the industry transitions to “multi-modal models requiring audio- and video-based training and inference,” in addition to text.
Additionally, she foresees smaller, more agile models catering to specific verticals or use-cases, especially as Gen AI proliferates across the enterprise market.
Sovereign AI Build-Out
On the topic of sovereign AI, Kress notes that while governments lag behind the largest cloud service providers in their AI journey, Nvidia is well-positioned to benefit from the build-out of AI infrastructure tailored to “local, idiosyncratic requirements,” such as specific languages and demographic considerations.
Chart: Nvidia Shares Skyrocket Nearly 800% Since 2023
Image: Benzinga Pro
Nvidia Stock Outlook
Goldman Sachs sees significant potential for further gains despite Nvidia's year-to-date outperformance. The stock trades at next twelve months price-to-earnings (P/E) and enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) multiples relative to the sector median that are “well below their respective historical medians.”
Hari expects Nvidia to maintain its status as the “industry de facto standard”, with a 12-month price target of $135, based on 50x their normalized EPS estimate of $2.70.
The scenario analysis offers a compelling risk-reward profile, with a 106% rally in the most bullish outcome, and a 77% drop in the most bearish one.
Key downside risks for Nvidia include a sudden decline in Gen AI infrastructure spending by major cloud service providers and enterprises, weakening demand for gaming GPUs, further restrictions on GPU exports and supply chain issues such as delays in new product introductions
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Image created using artificial intelligence via Midjourney.