With A $2 Trillion Valuation, What Are The Risks For Nvidia Stock?


Nvidia (NASDAQ: NVDA) stock has rallied by almost 3.3x over the past 12 months to about $790 per share, taking Nvidia’s market cap near the vaunted $2 trillion mark. There’s a lot of reason for the optimism with Nvidia stock.  As the artificial intelligence arms race gathers pace, technology companies and developers scramble to buy high-end graphics units to deploy generative AI into their applications and software. Nvidia currently dominates the market for AI silicon with chips including the A100 and H100 tailor-made for AI applications. Nvidia’s earnings have also soared accordingly. The company saw revenue for Q4 FY’24 grow by 265% year-over-year to $22.1 billion, while net income surged to $12.3 billion, up from $1.4 billion in the year-ago period. Nvidia’s chips are also meaningfully ahead of rivals such as AMD and Google’s Tensor processing units in terms of performance at the moment. The company has also built an ecosystem around its AI tools, with its programming languages, and software, which are helping the company drive incremental sales and lock in customers. These software tools, coupled with higher economies of scale, are enabling the company to post record-high margins. Gross margins stood at a lofty 76% in the most recent quarter, up from about 63% in the year-ago period. Net margins stood at an incredible 55% in Q4.

Looking at a slightly longer period, NVDA stock has seen extremely strong gains of 510% from levels of $130 in early January 2021 to around $790 now, vs. an increase of about 35% for the S&P 500 over this roughly 3-year period. However, the increase in NVDA stock has been far from consistent. Returns for the stock were 125% in 2021, -50% in 2022, and 239% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that NVDA underperformed the S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the Information Technology sector including MSFT, AAPL, and AVGO, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could NVDA face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

Looking at Nvidia’s valuation, the stock now trades at about 36x consensus 2025 earnings and 29x 2026 earnings. This is not an unreasonable multiple, considering Nvidia’s heady growth. That said, there are risks as well. Firstly, the big surge in GPU demand that we are currently seeing could potentially ease, as the initial training phase of AI large language models slows down. After the training of models, the phase of utilizing these models could shift toward lower-power requirements, or potentially even on-device capabilities, reducing demand growth for GPUs.

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Moreover, competition in the market could also mount with players such as AMD investing considerably to catch up in this space given the high stakes. Additionally, big tech players such as Google, Microsoft, and Amazon are also doubling down on developing their own AI and machine learning-related silicon. This could also pose a risk for Nvidia, as the big tech players remain the company’s largest customers. Over FY’24, the company indicated that a single customer (which was not named) accounted for 13% of its overall revenue. Big tech players could eventually slow their capex on AI-related infrastructure, as they move toward a phase of figuring out how to monetize their new capabilities.

Nvidia is also not immune to the geopolitics of the chip business. Given the strategic importance of AI,  the U.S. government has been regulating the sales of some key products in markets such as China and the Middle East. While Nvidia has designed chips that work around these rules, further regulations could adversely impact the company’s business. Moreover, geopolitical issues could also disrupt the company’s supply chain.  At the moment the supply of Nvidia GPUs is almost entirely reliant on Taiwan-based TSMC. Taiwan has faced mounting tensions in recent years with China, which has been asserting that Taiwan is part of its territory. We value NVDA at about $731 per share, about 7% below the market price. See our analysis on Nvidia Valuation: Is NVDA Stock Expensive Or Cheap? for more details on what’s driving our price estimate for NVDA stock.

Returns Feb 2024
MTD [1]
Since start
of 2023 [1]
Total [2]
 NVDA Return 28% 439% 2854%
 S&P 500 Return 5% 32% 127%
 Trefis Reinforced Value Portfolio 3% 41% 625%

[1] Returns as of 2/25/2024
[2] Cumulative total returns since the end of 2016

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