By Lewis Krauskopf
NEW YORK (Reuters) – The massive rally in Nvidia Corp shares has investors pondering whether to cash in, hold on to more gains or chase a stock that has tripled in the past year.
Nvidia briefly became the largest US company by market value this week thanks to a share price increase of more than 1,000% since October 2022. The share price is up 206% in the past twelve months.
Nvidia bulls say more gains are on the way. The Santa Clara, California-based company is at the forefront of a massive technological shift as the dominant supplier of chips to support artificial intelligence applications. Sales are expected to double to $120 billion this fiscal year and rise to $160 billion the following year. By comparison, Microsoft is expected to grow revenue by about 16% in the fiscal year.
The stock’s eye-popping performance has investors worried about missing out on even more gains. Yet it has also given Nvidia’s stock a richer valuation: its price-to-earnings ratio has grown 80% this year, for example. That could make the company’s shares more vulnerable to sharp pullbacks if bad news arrives.
“What it has done in the past … should not drive the investment decision,” said Chuck Carlson, CEO of Horizon Investment Services. “However, with a stock like Nvidia it is extremely difficult not to let that play a role in the investment decision, because you have a sense of pursuit.”
FORWARD AND UP
So far, Nvidia’s stock price trajectory has rewarded bullish investors and punished doubters. The stock is up 164% in 2024, while its market value has soared to more than $3.2 trillion, briefly putting it ahead of Microsoft and Apple this week.
Optimistic investors point to Nvidia’s dominance in the AI chip sector as a key reason for their optimism.
The high performance of Nvidia’s chips makes them difficult to replace in AI data centers. What extends this lead is the proprietary software framework that developers use to program AI processors.
Ivana Delevska, founder and chief investment officer of Spear Invest, remains optimistic about the prospects for Nvidia stock as she expects earnings expectations beyond what Wall Street analysts are predicting.
Nvidia is the top holding in the Spear Alpha ETF, with nearly 14% of the fund.
“If the share price has gone up so much, but earnings haven’t really changed, we would be very concerned,” Delevska said. But “where we are now, there’s pretty solid earnings support.”
Nvidia’s forward price-to-earnings ratio of around 45 is only modestly higher than its five-year average price-to-earnings ratio of 41, even after growing from 25 at the start of the year, according to LSEG Datastream. At the same time, that rating has fallen compared to more than 84 about a year ago.
Tom Plumb, president of Plumb Funds, said he believes the capabilities for Nvidia’s chips beyond AI are undervalued. The company has owned Nvidia stock for more than seven years and is the largest position in its two funds.
“What we’re really talking about is data and access to data,” Plumb says. “And they have the fastest, smartest chip that makes that possible.”
CAREFUL AHEAD?
Others have grown wary about Nvidia’s prospects of making stunning profits in the future.
Nvidia has a “truly revolutionary” product and has achieved “unprecedented growth,” said Gil Luria, analyst at DA Davidson. However, he has a “neutral” rating on the stock and a price target of $90, compared to the share price of $130.78 on Thursday.
Looking ahead several years, Luria says he doubts Nvidia’s customers will spend enough to boost Wall Street’s earnings estimates that support the company’s valuation.
“The caution toward Nvidia comes from its longer-term prospects,” Luria said. “These kinds of performances are very difficult to maintain.”
Billionaire investor Stanley Druckenmiller said last month that he had cut his big bet on Nvidia in 2024, telling CNBC Television that “AI may be a little overhyped now, but it will be underhyped in the long run.”
Carlson of Horizon Investment Services rates Nvidia as a ‘buy’, but the stock’s relatively expensive valuation means it would fall short of being included in Horizon’s roughly 30 stock portfolios.
Other concerns include possible competition that will erode Nvidia’s leading position in the market. Technology giants Microsoft, Meta Platforms and Google owner Alphabet are competing to build out their AI computing capabilities and add the technology to their products and services.
Analysts at Morningstar, which has a fair value of $105 on the stock, said leading suppliers such as Amazon, Microsoft and Meta Platforms will eventually look to reduce their dependence on the company 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,” Morningstar’s Brian Colello wrote this month. “However, any appearance of successful development of alternatives could meaningfully limit Nvidia’s lead. .”
(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Gerry Doyle)
