The Nvidia (NASDAQ:NVDA), its stock price surged over threefold in 2023, driven by high demand for AI chips. However, Asian chip makers, responsible for Nvidia’s chips, are seeing their lowest earnings in years.
Investors optimistic about Nvidia’s ongoing impressive performance should take heed of the challenges the global advanced chip industry is currently facing.
Nvidia’s exceptional rally is linked to its crucial role in AI-related technology, including ChatGPT and self-driving cars, with its high-performance graphics processing units leading sales.
Nvidia Fundamentals
Nvidia excels in boosting computing platforms with high-quality graphics processing units. Its chips are used widely, from gaming to data centers. The company has pivoted to AI and self-driving technology for growth. Despite a $1 trillion market cap, there are many metrics point to potential overvaluation.
From a price-sales ratio of 42-times to an Enterprise Value/EBITDA ratio of 165-times, Nvidia is among the most expensive companies in the world. Most investors won’t dispute that.
Of course, you get what you pay for. And many investors are wiling to pay up for this quality.
But, NVDA stock seems considerably overpriced. This suggests potential lower returns compared to future business growth.
Even with its solid financials, Nvidia’s growth ranks lower than 53.12% of peers in the Semiconductors industry. (That’s partly due to the company’s absolute size at current levels, but still).
Take Caution
Nvidia’s growth is hindered by limited capacity, as AI chips remain a small part of overall sales. Sharing resources with clients like Apple, chip oversupply masks future risks.
Gaming and crypto sectors, also dependent on Nvidia chips, have to compete for supply. Threats include chip engineer shortages and rising Taiwan-China tensions.
With the rising complexity of machine learning models like generative AI, more chips are needed to meet computing demands. Nvidia stands to gain from the AI trend, but supply constraints and market growth pace must be considered by investors.
Conference Call on Aug. 23
NVIDIA is set to hold a conference call on August 23, 2 p.m. PT, discussing its Q2 fiscal year 2024 results. The call will be available on investor.nvidia.com with a Q&A session limited to financial analysts and institutional investors.
Prior to the call, CFO Colette Kress will share written commentary on the results at approximately 1:20 p.m. PT.
UBS analyst Timothy Arcuri advises holding onto Nvidia shares before its August 23 Q2 earnings. Arcuri raised the price target to $540, citing short-term supply constraints leading to better profitability.
Saudi Arabia and UAE stockpiling Nvidia GPUs for their AI plans also contribute to optimism.
What Now
I’m optimistic about Nvidia’s future. It’s not just hardware and software sales; Nvidia is also investing in AI ventures. However, the AI landscape is changing, and Nvidia’s valuation might be high compared to its fundamentals, even considering 2025 growth estimates.
Consider selling NVDA shares for profits if you hold any and await a share price decrease. Nvidia is strong in a rapidly growing niche, but pricey stocks are susceptible during market shifts. Caution is advised for potential Nvidia investments.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
