NEWS ANALYSIS: Rocketing Nvidia leaves investors mulling whether to cash in or buy more

New York — The huge rally in Nvidia Corp’s shares has investors weighing whether to cash in, hold on for more gains or chase a stock that has tripled during the past year.

Nvidia last week briefly became the largest US company by market value on the back of a more than 1,000% surge in share price since October 2022. It is up 206% in the past 12 months.

Nvidia bulls say more gains are coming. The Santa Clara, California company stands at the forefront of a huge technological shift as the dominant provider of chips to support artificial intelligence applications. Revenue is expected to double this fiscal year to $120bn and rise to $160bn in the year after. Microsoft, by comparison, is expected to grow revenue by about 16% for its fiscal year.

The stock’s eye-popping performance is drawing in investors afraid of missing out on more gains. Yet it has also made Nvidia’s shares more richly valued: its forward price-to-earnings ratio has grown 80% this year. That could make the company’s shares more vulnerable to sharp pullbacks when bad news hits.

“What it’s done in the past … shouldn’t be driving the investment decision,” said Chuck Carlson, CEO at Horizon Investment Services. “However, on a stock like Nvidia, it’s awfully hard to have that not be a factor in the investment decision because you have this chasing feeling.”

So far, Nvidia’s share price trajectory has rewarded bullish investors and punished doubters. The stock is up 164% in 2024, as its market value has surged to more than $3.2-trillion, briefly putting it ahead of Microsoft and Apple last week.

Optimistic investors point to Nvidia’s dominance of the AI-chip sector as a key reason for their bullishness.

The high performance of Nvidia’s chips makes it difficult to replace in AI data centres. Adding to this lead is its proprietary software framework that developers use to program AI processors.

Top holding

Ivana Delevska, founder and chief investment officer of Spear Invest, remains bullish on the outlook for Nvidia shares, as she expects upside to earnings beyond what Wall Street analysts are forecasting.

Nvidia is the top holding in the Spear Alpha ETF, at nearly 14% of the fund.

“If the [stock] price has gone up like it has but the earnings haven’t really moved, we would be very worried,” Delevska said. But, “where we are here it has solid earnings support”.

Indeed, Nvidia’s forward price-to-earnings ratio of about 45 is only modestly higher than its five-year average P/E of 41, even after growing from 25 at the start of the year, according to LSEG Datastream. That valuation is down from more than 84 about a year ago.

Tom Plumb, president of Plumb Funds, said the opportunity for Nvidia’s chips beyond AI was underappreciated. The firm has held Nvidia shares for more than seven years and it is the largest position in its two funds.

“What we really are talking about is data and access to data,” Plumb said. “And they have the fastest, smartest chip that allows that.”

Others have grown wary about Nvidia’s prospects of delivering stunning gains in the future.

Nvidia has a “truly revolutionary” product and has posted “unprecedented growth”, said Gil Luria, an analyst with DA Davidson. However, he has a “neutral” rating on the stock and a $90 price target, compared with the stock’s price of $130.78 on Thursday.

Looking ahead several years, Luria said he doubted Nvidia’s customers will spend enough to drive the Wall Street earnings estimates that support the company’s valuation.

Overhyped now

“The caution on Nvidia comes from the longer-term outlook,” Luria said. “This type of performance is very hard to maintain.”

Billionaire investor Stanley Druckenmiller said last month that he reduced his big bet in Nvidia in 2024, telling CNBC television that “AI might be a little overhyped now, but underhyped long term.”

Carlson, of Horizon Investment Services, considers Nvidia a “buy”, but because of the stock’s relatively expensive valuation, it would not make the cut to be included in Horizon’s about 30-stock portfolios.

Other concerns include eventual competition that erodes Nvidia’s market-leading position. Tech giants Microsoft, Meta Platforms, and Google-owner Alphabet are competing to build their AI computing capabilities and add the technology to their products and services.

Analysts at Morningstar, which has a $105 fair value on the stock, said leading vendors such as Amazon, Microsoft and Meta Platforms will eventually seek to reduce their reliance on the company and diversify their supplier base.

“Nvidia dominates AI today and the sky is the limit for the company’s profitability if it can maintain this lead over the next decade,” Morningstar’s Brian Colello wrote this month. “However, any semblance of the successful development of alternatives could meaningfully limit Nvidia’s upside.”

Reuters