Nvidia Corporation’s shares have experienced a meteoric rise, leading investors to decide whether to cash in, hold for more gains, or chase a stock that has tripled over the past year. This week, Nvidia briefly became the largest U.S. company by market value, following a more than 1,000% surge in its share price since October 2022, marking a 206% increase in the last 12 months.
The Bullish Case for Nvidia
Nvidia bulls believe that more gains are on the horizon. The Santa Clara, California-based company stands at the forefront of a significant technological shift, dominating the market for chips that support artificial intelligence (AI) applications. With revenues expected to double this fiscal year to $120 billion and rise to $160 billion the following year, Nvidia’s growth outpaces that of tech giants like Microsoft, which is projected to see a 16% revenue increase in its fiscal year.
The stock’s impressive performance has attracted investors fearing they might miss out on further gains. However, this surge has also made Nvidia’s shares more richly valued, with its forward price-to-earnings (P/E) ratio growing by 80% this year, potentially making the stock more vulnerable to sharp pullbacks when bad news hits.
Rewarding the Bulls, Punishing the Doubters
So far, Nvidia’s share price trajectory has rewarded bullish investors and punished skeptics. The stock is up 164% in 2024, with its market value surpassing $3.2 trillion, briefly overtaking Microsoft and Apple this week.
Optimistic investors point to Nvidia’s dominance in the AI-chip sector as a key reason for their bullishness. The high performance of Nvidia’s chips makes them difficult to replace in AI data centers, and its proprietary software framework is integral for developers programming AI processors.
Ivana Delevska, founder and chief investment officer of Spear Invest, remains bullish on Nvidia’s outlook, anticipating upside to earnings beyond Wall Street forecasts. Nvidia is the top holding in the Spear Alpha ETF, comprising nearly 14% of the fund. Delevska noted, “If the stock price has gone up like it has but the earnings haven’t really moved, we would be very worried. But where we are here, it has pretty solid earnings support.”
A Modest Valuation Despite Growth
Nvidia’s forward P/E ratio of about 45 is only slightly higher than its five-year average P/E of 41, despite increasing from 25 at the start of the year. This valuation remains lower than its peak of over 84 about a year ago.
Tom Plumb, president of Plumb Funds, believes the potential for Nvidia’s chips extends beyond AI. Plumb’s firm has held Nvidia shares for over seven years, making it the largest position in its two funds. “What we really are talking about is data and access to data,” Plumb said. “And they have the fastest, smartest chip that allows that.”
Growing Caution Among Some Analysts
However, some analysts have grown cautious about Nvidia’s future prospects. Gil Luria, an analyst with D.A. Davidson, acknowledges Nvidia’s revolutionary product and unprecedented growth but maintains a “neutral” rating on the stock with a $90 price target, compared to its current price of $130.78.
Luria expressed concerns about the long-term outlook, doubting whether Nvidia’s customers will spend enough to meet Wall Street’s earnings estimates that justify the company’s valuation. “The caution on Nvidia comes from the longer-term outlook. This type of performance is very hard to maintain,” Luria said.
Competition and Future Challenges
Other concerns include potential competition that could erode Nvidia’s market-leading position. Tech giants like Microsoft, Meta Platforms, and Google-owner Alphabet are building their AI computing capabilities and integrating AI technology into their products and services.
Analysts at Morningstar, who have a $105 fair value on Nvidia’s stock, noted that leading vendors such as Amazon, Microsoft, and Meta Platforms might eventually reduce their reliance on Nvidia and diversify their supplier base. “Nvidia dominates AI today, and the sky is the limit for the company’s profitability if it can maintain this lead over the next decade,” wrote Morningstar’s Brian Colello. “However, any semblance of the successful development of alternatives could meaningfully limit Nvidia’s upside.”
Nvidia’s remarkable share price rally highlights both the opportunities and risks in investing in a company at the forefront of AI technology. While its dominant position in the AI-chip market suggests further potential gains, high valuations and future competition pose significant challenges. Investors must weigh the bullish outlook against the potential for volatility and market shifts as they consider their next moves.
