On Thursday, Morgan Stanley maintained its Overweight rating on NVIDIA (NASDAQ:NVDA) and increased the stock's price target to $795 from $750. The firm's analysis suggested that recent market dynamics, including the focus on declining H100 lead times, had created a buying opportunity in December.
The subsequent rise in NVIDIA's stock price was attributed first to indications of strong short-term demand and then to hyperscalers' statements about sustained high spending.
Morgan Stanley acknowledged the potential for an overordering cycle in the semiconductor industry, which could lead to headwinds in the training market in Calendar Year 2025. Despite this, the firm expects the cost of training models to continue to rise and posits that the market could see consolidation, drawing parallels to the computer vision AI sector in 2018.
The report highlighted NVIDIA's significant supply ramp-up, which is anticipated to eventually bring the market into equilibrium. The inference market, which is predicted to grow next year, was also seen as a mitigating factor for potential concerns. NVIDIA's position in the inference market could strengthen if it comes off allocation, according to Morgan Stanley.
Looking ahead, Morgan Stanley pointed to the upcoming B100 product cycle as a major factor that will drive investment, market share, and pricing. Customer spending is seen as the limiting factor for growth, but the B100 is still expected to be a significant driver.
The firm's price target adjustment to $795 reflects a maintained target multiple of 35 times Morgan Stanley's estimated earnings per share (EPS). This valuation adjustment was made in the context of a rally in other compute names with AI exposure, which, according to the firm, makes NVIDIA's valuation more justifiable.
InvestingPro Insights
In light of Morgan Stanley's upbeat assessment of NVIDIA (NASDAQ:NVDA), it's worth considering the financial health and market performance of the company through the lens of InvestingPro. NVIDIA's strong fundamentals are underscored by a perfect Piotroski Score of 9, which indicates a very healthy financial situation, and this could be one of the factors bolstering Morgan Stanley's confidence in the stock.
InvestingPro Data reveals that NVIDIA has a robust revenue growth rate of 57.07% for the last twelve months as of Q3 2024, reflecting the company's expanding market presence and sales efficiency. The revenue growth is even more impressive when looking at the quarterly figure, which is at a staggering 205.51% for Q3 2024. This supports the optimism around NVIDIA's supply ramp-up and its potential to capitalize on the inference market.
With a P/E Ratio of 87.03 and a forward-looking PEG Ratio of just 0.4, NVIDIA seems to be trading at an attractive valuation relative to its near-term earnings growth, which may justify Morgan Stanley's increased price target. The PEG ratio, in particular, suggests that NVIDIA's stock price has room to grow when considering its earnings growth rate.
InvestingPro Tips indicate that analysts are bullish on NVIDIA's prospects, with 12 analysts having revised their earnings upwards for the upcoming period. This consensus could be a signal for investors that NVIDIA's growth trajectory is expected to continue, aligning with the investment thesis laid out by Morgan Stanley.
For readers interested in a deeper dive into NVIDIA's financial health and market performance, InvestingPro offers additional insights and metrics. By using the coupon code PRONEWS24, readers can get an extra 10% off a yearly or biyearly Pro and Pro+ subscription, gaining access to a wealth of information including 23 additional InvestingPro Tips that could help in making more informed investment decisions.
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