Although dominant in the artificial intelligence (AI) industry, Nvidia has reached a market valuation of more than US$1 trillion (US$1 billion) that leaves some experts perplexed.
Various experts estimate Nvidia’s (NVDA, US$460.18) market share in processors used for AI at around 80%. Earlier this year, research firm CB Insights even suggested that the company dominated 95% of this industry.
On August 23, the company delivered financial results well above forecasts for its second quarter of 2024, while unveiling revenue and profit margin targets for the current quarter beyond expectations, which English speakers call a “beat and raise”.
For the quarter ended July 30, the company reported earnings per share of US$2.70 and revenue of US$13.51 billion, easily beating analysts’ consensus forecasts of 2.09, respectively. US$ and US$11.22 billion, according to Refinitiv.
Additionally, Nvidia management has hinted that it will generate revenue of US$16 billion in the third quarter, which would be an increase of 170% year-over-year, while analysts expect US$12.61 billion in average.
However, the day after the publication of such sparkling results, the company’s stock ended the day up just US$0.47, or 0.1%, at US$471.63, before falling by 2.43% during the following session.
“When a company dominates a fast-growing industry, there comes a point where its valuation no longer means anything. If Nvidia and AI-related stocks do not beat forecasts by a wide margin, the penalty could be very heavy. Even good results could be punished on the stock market,” explains John Plassard, investment specialist at Mirabaud.
“The performance of Nvidia’s stock after the publication of its quarterly results confirms that the current valuation demands a lot from the stock. The company is exceptional, but to buy at the moment, you have to cross your fingers that all the stars remain aligned and that the most optimistic scenarios come true,” adds Mathieu Bouthillier, president and portfolio manager at B-Cap.
Experts from the Fundamental Equity Management team at Manulife Investment Management argue that the stock’s valuation right now already incorporates at least two years of strong earnings growth. “Yes, Nvidia sells a lot of processors for data centers, at higher profit margins than for its gaming products, but the big question is whether this pace of revenue growth is sustainable,” they say. It may last a few quarters, but when next year’s results are compared to this year’s, which are already showing strong growth, it will become much more difficult.
Mathieu Bouthillier believes that it is dangerous to invest in the AI industry at the moment, as the semiconductor industry as a whole is currently in overproduction and overstocking.
“We have 166 days of semiconductor stock at the moment, while the average is 100 days. Demand is contracting, but when we look at the stock market, we might have a different perception. Of all this, AI products represent about 8% of total global production, with the rest going to smartphones, personal computers and industrial production, among others in the automotive sector. If we invest in semiconductors only to benefit from the strong growth of AI, we have an incomplete vein,” says the director of B-Cap, who recently even went so far as to take a small short position. on Nvidia’s title.
Risk of shortness of breath?
John Plassard adds that the euphoria which has allowed technology stocks exposed to AI to appreciate considerably since the start of the year could show signs of running out of steam.
“AI is here to stay, but it is also possible that its large-scale implementation will take longer than expected, much like what happened with the metaverse in recent years. Investors have realized, thanks to ChatGPT and Bard, that AI has become accessible, but it is still only the beginning,” he says. To provide a counterbalance to the experts interviewed by Lesaffaires, the consensus of the 51 analysts who follow Nvidia’s stock is much more optimistic, opting for an average target price over one year of US$605.