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Exclusive: This analyst says Nvidia's stock 'appears vulnerable to a correction'

Published 2024-02-26, 10:06 a/m
Updated 2024-02-29, 10:48 a/m
© Reuters

Investing.com -- Nvidia's (NASDAQ:NVDA) stock price edged higher in early U.S. trading on Monday after the poster child for a surge in demand for artificial intelligence briefly touched a market capitalization of $2 trillion in the prior session.

NVDA stock price and market cap

The California-based group's stock price has risen sharply over the past week -- and, indeed, for much of the last twelve months.

Bumper quarterly earnings sent shares in Nvidia soaring in value by $277 billion on Thursday, marking the largest one-day gain in Wall Street history. After the end of trading in New York on Friday, Nvidia had a market value of $1.97 trillion.

Once known as a provider of graphics processors for computer games, Nvidia has assumed a central role in a wave of euphoria for AI that has led a wide range of businesses to invest heavily in developing their usage of the nascent technology.

Nvidia's best-selling chips, which can help developers assess and analyze data for large language models, have turned into standards for the wider tech industry. They have subsequently powered the proliferation of so-called generative AI systems that can turn prompts into complex text, videos and images.

One of these chips, the H100, initially gained notoriety as the workhorse for OpenAI's megapopular chatbot ChatGPT. It has since become the must-have item in a rapidly accelerating AI arms race, particularly as companies face increasing pressure to show progress in their AI offerings.

Instagram-owner Meta Platforms (NASDAQ:META) has said it is seeking to secure 350,000 of the processors this year alone. Elsewhere, Nvidia has said it has seeing spending on AI rise in industries like automotive manufacturing, financial services and healthcare. Even countries, the firm has noted, are lining up to snap up its chips.

Latest Nvidia earnings

Last week, Nvidia reported better-than-expected fourth-quarter revenue and outlined a bullish forecast for AI-fueled chip demand.

For the three months ended Dec. 31, Nvidia announced a 265% spike in revenue to $22.1 billion. Analysts polled by Investing.com had called for revenue of $20.55 billion.

Revenues at Nvidia's data center unit, which typically makes up the largest portion of total sales, swelled to $18.40B, up 409% from a year earlier, beating estimates of $17.06B.

"Nvidia delivered against what was seemingly a very high bar with Data Center once again serving as the key growth driver," analysts at Goldman Sachs (NYSE:GS) said in a note to clients.

Nvidia stock forecast

Weighing in on the AI boom, Nvidia Chief Executive Jensen Huang declared that the technology is at a "tipping point."

Speaking with investors, Huang said Nvidia's chips had become "AI-generation factories" in a new industrial revolution that will encompass "every industry."

For the current quarter, revenue is expected to be $24B, give or take 2%, topping analyst estimates for $22.01B. Adjusted gross margins are expected to be 76.3% and 77.0%, respectively, plus or 50 basis points.

"We had never seen $2 bn [or more] of upside to quarterly revenue guidance until Nvidia did it a few quarters ago, but it has become routine during the AI surge," analysts at Morgan Stanley (NYSE:MS) wrote in a note.

The company is now looking to bolster its position as the focal point of AI demand, but analysts have flagged several risks that may complicate this task.

Is Nvidia vulnerable to a correction?

Although H100s are now viewed as one of the hottest commodities in Silicon Valley and beyond, they are often selling faster than Nvidia can ship them. Supply, not demand, is becoming a major issue for the firm as a result.

Meanwhile, data center sales to China "declined significantly" in the fourth quarter due to U.S. government licensing requirements, Nvidia said. In a note, analysts at Bank of America (NYSE:BAC) said that Nvidia's future growth in the country -- which accounts for roughly a fifth of its total revenue -- could "face additional risks if shipment restrictions tighten again."

Given these potential headwinds and a valuation higher than other chipmakers, Sandeep Rao, Senior Researcher at Leverage Shares has flagged that Nvidia's stock may be "priced at a premium." He also argued that Nvidia's reliance on outside contract chip suppliers like Taiwan's TSMC could reduce its ability to control costs and roll out future innovations.

"Despite strong near-term prospects, Nvidia's stock appears vulnerable to a significant correction due to inflated valuations, unsustainable growth trends, and broader market sentiment," he said.

Discover more about AI stocks

Looking to assess the performance of other AI stocks? Our dedicated page offers a comprehensive list of alternative AI companies spanning various industries and technologies. Assess the performance across popular AI stocks including Nvidia (Learn more: What is Nvidia?)

If you are interested in a diversified approach to investing in AI, consider exploring AI ETFs, which offer exposure to a basket of companies involved in artificial intelligence technologies. Our page provides information on various AI ETFs, allowing you to assess their performance alongside individual AI stocks.

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