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The frenzy surrounding artificial intelligence (AI) has lifted the share price of NVIDIA (NVDA) significantly over the past month, so much so that many analysts now see limited upside potential for the stock in the medium term. As of yesterday, the price of NVIDIA had more than doubled from its 2-year low in October of $108.13 a share. NVIDIA has surged on speculation that it stands to benefit from the AI craze as it dominates the market for chips used for complex computing required for artificial intelligence programs.
The soaring valuation of NVIDIA has prompted most analysts to cut their price estimates for the stock. As a result, shares of NVIDIA are down almost 6% today. The average price forecast by analysts is for a 9% drop in NVIDIA’s share price over the next 12 months to $204.19. Nvidia is valued at 51 times projected earnings, well above its average multiple of 30 over the past ten years.
The excitement over the new AI technology was sparked by the massive popularity of OpenAI’s ChatGPT tool. However, expectations for the technology to boost NVIDIA’s earnings may be too high, as the price target and earnings multiple for the stock show. AXS Investments said, “NVIDIA is trading rich from a valuation perspective, and there is room for some multiple compression in the stock price in the weeks and months ahead.”
Even though NVIDIA has built a multibillion-dollar server business in the last few years, it still depends heavily on the market for personal computers. Recent earnings reports from Intel (INTC) and Advanced Micro Devices (AMD) showed that demand has collapsed amid an excess of inventories and that new orders will remain stagnant until the second half of this year. As a result, analysts have been getting more pessimistic about NVIDIA, cutting their estimates for Q4 adjusted earnings per share by 26% over the past six months and lowering their revenue outlook for the stock by 22%. NVIDIA will report its quarterly earnings on February 22.
Despite the outlook for weaker earnings, some analysts remain bullish on NVIDIA. The stock has 37 buy ratings, 12 holds, and only two sell ratings. However, of the analysts with a buy rating on the stock, 15 have price targets below the current price, indicating that they will either have to raise their price targets or cut their ratings on the stock. Neuberger Berman said, “the near term remains challenging, but the key for a company like NVIDIA is to be able to innovate, execute on its product cycles, and deliver value for its customers.” As a result, we believe “the stock is attractive at current levels.”
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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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