Is Nvidia’s high valuation justified? A cautious fund manager gives two reasons to own the stock

Avatar photo


See all articles
Is Nvidia’s high valuation justified? A cautious fund manager gives two reasons to own the stock

Shares of Nvidia have rocketed by over 100% in the last six months. That has led some investors to question its extraordinary valuation on many measures during heightened risk in financial markets and a high-interest rate environment. For example, the stock currently reflects a 55 times forward price-to-earnings ratio, while the industry median is a mere 15.5 times on the same metric. Fund manager Ian Mortimer of Guinness Global Investors, whose fund has owned Nvidia shares for over 10 years, brushed aside those concerns saying he remains bullish thanks to the company's focus on artificial intelligence as a core part of its business. NVDA 1Y line Nvidia's business model centers around selling high-performance graphics processing units that are essential for running the algorithms behind artificial intelligence technologies. AI has become increasingly important across industries, and demand for GPUs has surged. Nvidia has capitalized on this trend by designing specialized GPUs that can handle the complex calculations required for applications, such as deep learning and natural language processing. "I think it is one of the companies where we do feel more comfortable with the prospects for that potential growth going forward to justify that higher multiple," Mortimer told CNBC's Pro Talks Wednesday. "People are looking for ways to invest in [the artificial intelligence] theme, and I think once again, Nvidia has shown its ability to capture a lot of that zeitgeist." While many investors may associate Nvidia's success with areas such as Bitcoin mining, especially during the pandemic, Mortimer emphasized that his fund's investment thesis focuses more on core business operations such as chips used for data centers and cloud computing. At its GPU Technology Conference (GTC) earlier this week, Nvidia grabbed headlines for its new quantum computing platform . However, the company also released chips that outperform equivalent Intel and AMD equivalent by 25% while lowering energy consumption by more than 75%. According to analysts at Mizuho Securities, these GPUs, targeted at the cloud operators such as Microsoft Azure and Amazon's AWS, have proved to be big profit generators for Nvidia. While Mortimer acknowledged that Nvidia is currently his most expensive holding in the $580 million Guinness Global Innovators Fund, he expects data center and cloud computing sales to continue rising. The fund manager also pointed toward Nvidia's profitability advantage relative to its peers as a reason to own the stock. The tech giant has consistently reinvested in its business while maintaining profitability. According to Mortimer, this rare feature gives it an edge over competitors who may struggle with balancing these two factors. Nvidia has reported an average free cash flow of $4.5 billion annually since 2018. The company also reported net profits of $4.4 billion for the year ending Jan. 2023. Following the GTC conference, Bank of America analyst Vivek Arya reiterated a buy rating on Nvidia and raised his price target, saying Nvidia's AI capabilities only expand its total addressable market. While citing Nvidia's partnerships with Microsoft, Amazon, Google and others, Arya said Nvidia's dominance in the generative AI and the large language model market could "reshape the existing tech industry." Analysts from BMO Capital Markets, Truist Securities, and Mizuho also raised their price targets following the GTC conference. Mortimer joined Guinness Global Investors in 2006 and also manages the $3.8 billion Guinness Global Equity Income.

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Exclusive Capital communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument.

Read our detailed Marketing Communication Disclaimer