Revisiting Nvidia Stock’s Risks As Valuation Tops $3.3 Trillion


Following a 10% rally over the last five trading days, Nvidia (NASDAQ: NVDA) has emerged as the world’s most valuable company, led by surging AI-driven graphics processing unit (GPU) demand and the company’s recent stock split. With a $3.3 trillion valuation, Nvidia is now worth more than tech behemoths Microsoft (NASDAQ:MSFT) and Apple (NASDAQ: AAPL).

Nvidia has a lot going for it. Companies are looking to shift their sizable installed base of traditional data centers to accelerated computing using GPUs to perform more artificial intelligence tasks. Nvidia’s accelerated computing chips remain meaningfully ahead of rivals such as AMD and Alphabet’s Tensor processing units in terms of performance at the moment. Over Q1 FY’25, the company saw sales more than triple year-over-year to $26 billion, while net profits were up over 7x to $14.9 billion. Nvidia’s outlook is also strong, with the company guiding for about $28 billion in revenue for Q2 FY’25, ahead of Street estimates and about 2x compared to the year-ago quarter.  Nvidia says that demand for its newer H200 and the Blackwell architecture chips is well ahead of availability, with supply expected to lag demand well into the next year. Moreover, while the initial AI models unveiled by the likes of OpenAI were largely text-based,  models are increasingly multimodal, working with speech, images, video, and 3D calling for higher computing power. This could support demand for GPUs in the near term.

Looking at a slightly longer period, NVDA stock has seen extremely strong gains of 940% from levels of $13 in early January 2021 to around $135 now, vs. an increase of about 45% 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 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.

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Coming back to Nvidia, what’s the outlook like for the stock? At the current market price of about $136 per share, Nvidia stock trades at about 50x forward earnings and the market might be pricing in that Nvidia will essentially own the AI chip market. However, this may not be the case. While Nvidia remains in pole position for AI chips, other chipmakers such as AMD are investing significantly to catch up in this space given the high stakes. AMD unveiled the MI300X chip which is targeted specifically at large language model training and inference for generative AI workloads. AMD claims that its new Instinct MI300X chip outperforms Nvidia’s chips in several parameters. AMD’s Data Center segment – which includes sales of its server chips and the MI300 series AI chips – saw sales rise by about 80% year-over-year to $2.3 billion in the most recent quarter. Separately, big tech players like Google are doubling down on AI and machine learning-related silicon. For example, Google’s Tensor Processing Units are specialized integrated circuits focused on machine learning. Although Nvidia’s chips are superior in terms of overall performance at present, with the company also using proprietary software and programming languages to better lock in customers, competition will make Nvidia’s current revenue growth rates and abnormally high margins unsustainable. Net margins stood at a whopping 57% during the last quarter.

Besides higher competition, there are some other concerns as well. The big surge in GPU demand we are currently seeing could potentially ease, as the initial training phase of AI large language models slows down. After training models, utilizing these models could shift toward lower-power requirements, or potentially even on-device capabilities, reducing demand growth for GPUs.

Nvidia’s revenue concentration is also an issue. Bloomberg estimates that Microsoft accounts for about 15% of Nvidia’s revenue, followed by Facebook parent Meta Platforms at 13%, Amazon at 6%, and Alphabet at about 6% of revenue. Many of these big customers are working on their own AI chips.

Governments are looking to regulate the sector, considering that AI is viewed as a transformational technology. The Biden administration has placed export restrictions on the export of advanced chips such as the  A100 and H100 GPUs to China. Although Nvidia has tweaked the design, offering altered chips that play within the rules of the Chinese market, this does underscore the risks for the company.

Although the company has growth on its side, with sales likely to roughly double this year per consensus estimates, this could prove a risk for investors if growth falters for any reason, particularly in the current high-interest rate environment. We value Nvidia stock at $89 per share, about 34% below the current 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. Also, see our analysis of Nvidia Revenue for a closer look at the company’s key revenue streams.

 Returns Jun 2024
MTD [1]
YTD [1]
Total [2]
 NVDA Return 24% 174% 4978%
 S&P 500 Return 4% 15% 144%
 Trefis Reinforced Value Portfolio 4% 8% 666%

[1] Returns as of 6/19/2024
[2] Cumulative total returns since the end of 2016

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