Why Did NVIDIA Stock Go Up? A Quick Visualization of Nvidia Stock Price
This data visualization explores the factors contributing to the rise of NVIDIA's stock (As May 26, 2023). NVIDIA, a leading company in the AI revolution, has experienced a significant increase in its stock price.
Jun. 5. 2023 Update:
With the latest hype of AI, investors are pouring into $NVDA and pushing the trades at 38x sales and over 200x earnings. This number speaks volume about the market confident in $NVDA, consiering that Nvidia currently has only $26 billion in sales versus $208-525 billion for the Big 4 (Microsoft, Apple, Google and Amazon).
Nvidia currently has only $26 billion in sales versus $208-525 billion for the Big 4 (Microsoft, Apple, Google and Amazon). Just how high are these expectations? Nvidia now trades at over 38x sales and over 200x earnings. We’ve never before seen a price to sales ratio that high… pic.twitter.com/PyaVHd2g6j
— Peter Mallouk (@PeterMallouk) June 4, 2023
Factors Driving NVIDIA's Stock Increase
Let's dive into the reasons behind this surge and examine key financial aspects of NVIDIA's performance.
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Surge in AI Chip Demand: NVIDIA's stock has witnessed a notable increase of 26% after hours, primarily driven by a surge in demand for AI chips. As the demand for artificial intelligence and machine learning technologies grows, NVIDIA, with its expertise in developing high-performance AI chips, is well-positioned to capitalize on this trend.
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Impressive One-Year Growth: Over the past year, NVIDIA's stock has soared by an impressive 126%. This substantial growth demonstrates the company's ability to deliver value to its investors and reflects the market's confidence in NVIDIA's prospects.
Financial Insights
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Free Cash Flow Yield: NVIDIA's free cash flow yield stands at a mere half a percent, indicating that the company generates limited free cash flow relative to its market value. However, it's worth noting that 70% of this free cash flow is allocated to stock-based compensation.
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Comparison with Berkshire: NVIDIA's market capitalization now surpasses that of Berkshire Hathaway, a renowned conglomerate. In 2022, Berkshire recorded $22 billion in free cash flow, significantly higher than NVIDIA's $8 billion. Furthermore, Berkshire does not have stock-based compensation expenses.
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Investor Expectations: The market capitalization of NVIDIA suggests that investors are betting on significant future growth in the company's free cash flow. To match Berkshire's cash flow capability, NVIDIA's free cash flow would need to triple, while stock-based compensation would need to decrease from 70% to 0% of cash flows. It is important to note that while this scenario is plausible, it may not be deemed likely.
In conclusion, the rise in NVIDIA's stock can be attributed to the increasing demand for AI chips and the company's impressive performance over the past year. However, investors' expectations regarding NVIDIA's future free cash flow and stock-based compensation reduction contribute significantly to the current market capitalization. While these projections are possible, their realization is uncertain.
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