The remarkable rise in Nvidia Corp’s (NASDAQ:NVDA) stock has investors pondering whether to lock in gains, stay invested for further growth, or jump into a stock that has tripled over the past year.
This week, Nvidia briefly claimed the title of the largest U.S. company by market value, driven by a staggering 1,000% surge since October 2022 and a 206% increase in the last 12 months alone.
Bullish investors cite Nvidia’s pivotal role in the AI-chip sector as a key reason for optimism. The company is poised at the forefront of a technological revolution, expected to double its revenues this fiscal year to $120 billion and rise further to $160 billion next year. In contrast, traditional giants like Microsoft (NASDAQ:MSFT) are forecasted to grow revenues by about 16% this fiscal year.
However, Nvidia’s meteoric rise has also inflated its valuation metrics, including an 80% increase in its forward price-to-earnings ratio this year. This heightened valuation could potentially expose the stock to significant volatility during market downturns.
Chuck Carlson, CEO of Horizon Investment Services, cautioned, “What it’s done in the past… shouldn’t be driving the investment decision.” Yet, he acknowledged the allure of Nvidia’s momentum, admitting, “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.”
Nvidia’s market value surged to over $3.2 trillion, surpassing Microsoft and Apple (NASDAQ:AAPL) briefly this week. Despite the stock’s spectacular performance, U.S. electric carmaker Tesla (NASDAQ:TSLA) saw its market share in the region drop two percentage points to 4% in the first quarter, in spite of its sales growing 37% in the same period.
Ivana Delevska, founder and chief investment officer of Spear Invest, remains optimistic about Nvidia’s future earnings potential, indicating solid support for its current valuation. Nvidia holds a significant position in the Spear Alpha ETF, accounting for nearly 14% of the fund.
“Where we are here it has pretty solid earnings support,” Delevska emphasized, pointing to Nvidia’s forward price-to-earnings ratio of about 45, which remains modestly higher than its five-year average but lower than previous peaks.
Tom Plumb, president of Plumb Funds, echoed bullish sentiment, underscoring Nvidia’s potential beyond AI applications in data access and processing. Plumb highlighted Nvidia’s pivotal role in enhancing data capabilities through its cutting-edge chip technology.
However, not all analysts share the same optimism. Gil Luria from D.A. Davidson, despite acknowledging Nvidia’s revolutionary products and unprecedented growth, maintains a “neutral” rating on the stock with a price target well below its current trading price. Luria’s cautious stance reflects concerns over Nvidia’s ability to sustain its exceptional growth trajectory amid increasing competition and evolving market dynamics.
Billionaire investor Stanley Druckenmiller recently reduced his exposure to Nvidia, citing concerns over AI’s current market hype versus long-term potential.
Looking forward, Nvidia faces challenges from tech giants like Microsoft, Meta Platforms (NASDAQ:META), and Alphabet (NASDAQ:GOOGL), all striving to bolster their AI capabilities and potentially reduce reliance on Nvidia.
Morningstar analysts caution that while Nvidia currently dominates the AI market, sustained success hinges on maintaining this lead amidst emerging competition.
“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 noted. “However, any successful development of alternatives could significantly limit Nvidia’s upside.”
As Nvidia continues its upward trajectory, investors must navigate between its lofty valuation and the evolving competitive landscape to determine whether to capitalize on its momentum or exercise caution in the face of potential risks.
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