Nvidia still ‘top pick’ after Q1 results beat

Nvidia CEO Jensen Huang pictured in Beijing, China last week. Photo: Alex Wong/Getty Images.

Renewed Wall Street confidence in the strength and durability of AI-driven demand last night passed a big test after NVIDIA Corp produced yet another set of beat-and-raise results.

The earnings, which went “straight down the fairway” according to Morgan Stanley, were released against the backdrop of a 35% rebound for Nvidia shares since 30 March.

That turnaround from Nvidia’s lowest valuation multiple in seven years was accompanied by a 25% surge for the tech-focused Nasdaq over the same time frame, while the Philadelphia Semiconductor index has rallied by as much as 70% from its March low.

• Invest with ii: Buy US Stocks from UK | Most-traded US Stocks | Cashback Offers

The revival after a new year bout of AI jitters has left valuations for semiconductors and hardware stocks at around 27 times forward earnings. That compares with the historical peaks of around 29 times in October last year and June and March 2024.

The lack of progress on reopening of the Strait of Hormuz means elevated bond yields have the potential to weigh on tech valuations, especially given the sector’s heavy spending plans.

Despite these headwinds, UBS Global Wealth Management believes the fundamentals of the AI story remain strong after it noted the strength of demand in Nvidia results and said increased adoption of consumer agentic AI was another growth driver.

Agentic AI refers to AI systems composed of agents that can behave and interact autonomously to achieve their objectives.

UBS told clients: “Without taking any single-name views, we continue to hold a positive outlook on the secular trend of AI, and believe that exposure to this transformational innovation will remain a key differentiator for equity market performance over the long run.

“But several risks on the horizon also mean that investors should approach the theme through diversified and active investing.”

• City reacts to BT’s new dividend policy
• Trading Strategies: is BAE Systems overvalued after 270% rally?

It continues to favour platform and application beneficiaries that are well-placed for AI use cases, as well as infrastructure names with strong pricing power and competitive positioning in their respective supply chains.

The highlights of Nvidia’s first-quarter results included 85% year-on-year sales growth to $81.6 billion (£61 billion) and a projection of a figure of around $91 billion in the current quarter - much better than Wall Street’s estimate of $87 billion. A 75% gross margin also beat forecasts.

Deutsche Bank said the results continued the company’s emphasis on the burgeoning revenue opportunities outside of hyperscaler data centre builds.

It said this was shown by CEO Jensen Huang confidently stating his expectation that Nvidia should be able to outgrow hyperscaler capital expenditure, which has long seen as a limiting factor for Nvidia’s continued success.

This includes tapping into enterprise, sovereign AI, start-ups and proactively addressing the agentic AI-driven demand increase for CPUs (central processing units).

• War and fuel keep easyJet shares near multi-year low
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

Nvidia recently unveiled its Vera Rubin platform, with seven new chips now in full production to scale the world’s largest AI factories.

Sam Altman, CEO of OpenAI, said in March: “Nvidia infrastructure is the foundation that lets us keep pushing the frontier of AI.

“With Nvidia Vera Rubin, we’ll run more powerful models and agents at massive scale and deliver faster, more reliable systems to hundreds of millions of people.”

Nvidia shares today consolidated their position near $224, which represents a market valuation of $5.4 trillion. The price compares with Morgan Stanley’s post-results target of $288.

The bank regards Nvidia as its top pick in semiconductors, while Deutsche Bank has a target of $255.