(Bloomberg) — Nvidia Corp.’s runup since the start of 2023 has been so sudden and strong that even bullish investors are raising concerns about how much room its shares have left to run.
That’s what a nearly 550% gain since the start of last year will do to even the sturdiest of bull cases. While Nvidia’s profit and revenue growth are real, and sentiment on Wall Street remains overwhelmingly upbeat, runups of this magnitude tend to capture years of profit growth that haven’t yet been delivered. The stock has become one of the largest in the world, adding $2 trillion in value over the past 15 months.
A move such as this pulls “forward many years of future returns in a very condensed period of time,” according to Peter Boockvar, chief investment officer at Bleakley Financial Group. Fundamentals take a back seat and trading becomes fraught, he added.
Shares fell 0.8% on Tuesday.
While Nvidia’s head start in artificial intelligence chips looks formidable, there are reasons for caution beyond the basic math of share surges. Here are some of the main arguments:
Demand
Nvidia is benefiting from an arms race among companies rushing to boost computing power to run AI workloads. The chipmaker’s revenue doubled in its last fiscal year and is projected to rise an additional 81% this year, according to data compiled by Bloomberg.
While there are few signs that demand is slowing, the semiconductor industry is notorious for its boom and bust cycles. Throughout its five-decade history the business of chipmaking has consistently struggled to match long-term introductions of production capacity with short-term swings in demand, causing gluts and periods of shortages.
High-end chips such as Nvidia’s processors take in excess of a quarter to make and must be ordered from manufacturers months in advance. That makes forecasting a precarious game that companies haven’t always got right.
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At the end of 2023, four firms — Microsoft Corp., Meta Platforms Inc., Amazon.com Inc. and Alphabet Inc. — accounted for more than a third of Nvidia’s revenue, according to Bloomberg supply chain estimates. A slowdown in buying by these big data center owners would result in a revenue hit for Nvidia and a recalibration of growth estimates that would likely roil the stock.
“Right now the demand is there for Nvidia, in terms of Microsoft and Alphabet and Amazon all wanting to build out their AI infrastructure,” said Jeffrey Muhlenkamp, portfolio manager at Muhlenkamp & Co., who doesn’t hold Nvidia on valuation concerns. “If they can’t turn that around and make that capex profitable, there won’t be a second round of spending.”
Bulls argue that this is just the first wave of buying for AI chips and that the next spending surge will come from other industries such as drug makers, shipbuilders and carmakers, as well as governments.
Competition
With Nvidia’s profit in fiscal 2024 hitting nearly $30 billion, the competition is rushing to get a piece of the action. Nvidia’s nearest rival Advanced Micro Devices Inc. launched it’s AI-accelerator late last year and is forecasting revenue of as much as $3.5 billion this year from that area. Intel Corp. has its own range of AI chips and customers including Microsoft and Amazon’s AWS have their own internal chip design efforts.
“Nvidia’s margins are so high it just begs for competitors to come in,” said Logan Purk, the Edward Jones analyst who cut his rating on Nvidia to hold from buy in November. “Nvidia has done a fabulous job establishing a moat, especially with its software business, but everyone wants a piece of this space.”
Read More: Nvidia Looks to Extend AI Dominance With New Blackwell Chips
Last week, Nvidia Chief Executive Officer Jensen Huang unveiled a new chip design – the successor to the firm’s all conquering H100 product. When asked about his competition, Huang stressed that he’s not just offering chips, he’s providing networking and all of the software needed to rapidly deploy AI data centers. Huang characterized Nvidia’s competition as having a mountain to climb and analysts largely agreed.
Price Action
Nvidia’s booming profits have kept a lid on its stock market valuation, but its price-to-profit ratio is on the rise again. The stock is trading at 37 times profits projected over the next 12 months, up from about 25 times at the start of the year, according to data compiled by Bloomberg.
Lots of comparisons have been made between Nvidia’s rise and the dot-com era, when stocks like Cisco Systems Inc.’s soared on a similar thesis — buy the pick and shovel makers in a gold rush.
One of the biggest lessons from that bust was that even though an investor might be right about which companies will prevail, the price at which you pay for a stock is even more important.
Cisco’s annual profit has more than quadrupled since the stock peaked in 2000, but its shares are still down by nearly 40%.
“Whenever there is a craze and people get excited, expectations always come in so high that they are bound to disappoint,” said Brad Lamensdorf, co-manager of the AdvisorShares Ranger Equity Bear ETF.
—With assistance from Ian King and Subrat Patnaik.
(Updates to market open.)
©2024 Bloomberg L.P.
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