Should you buy Nvidia shares in Australia?

Many investors are likely wondering if they should buy Nvidia shares in Australia? Others still might be wondering just who this company is and whether it really deserves to be one of the top tech stocks across the globe. Whether or not NVDA deserves its place, it is one of the Magnificent Seven stocks and is worth over US$1tn. Consequently, it is worth knowing about as much as its peers.

Nvidia (NDQ:NVDA) share price chart, log scale (Source: TradingView)

Who is Nividia?

According to the company’s Investor Relations department,’ NVIDIA is the pioneer of GPU-accelerated computing’. GPU is short for graphics processing units and these are computer chips in their own right as well as chip components. These are designed to handle and accelerate graphics workloads and display graphics content to the extent that Central Processing Units (CPUs) could not at the time. This enabled the growth of PC gaming market.

AI pioneers

These days, GPUs are behind modern AI, because they act as the ‘brain’ of computers, robots and self-driving cars. Intel is actually a larger maker of graphic chips than NVDA because most of its CPUs ship with the company’s own integrated graphics silicon. But this goes to show that NVDA’s GPUs are very important to the world. Another client is OpenAI, which is behind Chat-GPT technology. Most investors will know what it is, but they won’t know that GPT-4 has over 1 trillion parameters. Clearly, very strong supporting technology will be needed. Yet more uses of GPUs are in cryptocurrency, semiconductors manufacturing, pharmaceuticals, the metaverse and electric vehicles. Granted, some of these technologies are at early stages, but since NVDA has such a foothold in many of these markets, there is huge opportunity ahead.

Just how much is it tipped to grow?

Nvidia is covered by nearly 50 analysts on Wall Street and the average target price is US$642.72, up 28% from its current levels. It uses a February to January financial year and analysts expect revenues to more than double from $27bn to $55bn. Then to $81.8bn in FY25, $99.1bn in FY26, then $112.5bn in FY27…hopefully you get the picture. Turning to its bottom line, it made a $4.4bn profit in its most recent annual results, representing a 16% margin and $1.74 per share. Analysts expect this figure to surge to $11.15 per share in the next 12 months, to $15.55 the year after, $18.71 the year after…again, you get the picture.

Seems expensive, but really isn’t

Like many tech stocks though, it is far from a clear course. NVDA released its most recent quarterly earnings and despite earnings being 20% above estimates, its share price was flat. US government restrictions on the export to chips to China are a short-term headwind. It is trading at a P/E of ~30x, a figure well ahead of the S&P500’s ~20x P/E, although few other stocks have such growth potential.

We observe that it is trading at a PEG of just 0.91x while the average of its peers is 2.2x. Meanwhile, the average P/E of the other Magnificent Seven is 36.2x and only Alphabet and Apple are lower than NVDA. Using the average P/E of 36.2, derives US$584 per share, up 17% from the current price.

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And so, should you buy Nvidia shares in Australia?

Ultimately, that is a question investors will have to answer for themselves. In our view, dividend investors should not, because the company is unlikely to pay dividends for a while. Investors uncomfortable with short-term fluctuations shouldn’t either. But as for investors with a long-term horizon, it will be difficult to go wrong with this one, unless things go terribly off the rails at the company, or in regard to the broader AI revolution, or in China.