(Bloomberg) — In the two years since ChatGPT sparked an AI frenzy, NVIDIA Inc.’s market capitalization has increased by $3 trillion, more than any other stock rally in history in such a short period of time. But things are now changing for chipmakers.
Competitors and customers are stepping up efforts to capture a larger share of the artificial intelligence chip market. The sector’s rapid revenue growth is slowing. President Biden is considering restricting overseas sales of Nvidia’s cutting-edge chips, but it’s unclear how President-elect Donald Trump will address this.
Does it look scary? None of these risks deter investors from betting that NVIDIA’s stock price rally could add hundreds of billions of dollars to its market value in 2025, as a surge in spending on AI computing gains momentum. It’s not something you can do.
“We’re not worried about Nvidia reaching its peak,” said Kevin Mahn, chief investment officer at Hennion & Walsh Asset Management. “We can expect more growth, but also more volatility. The AI revolution will be a long journey with many pitfalls.”
That turmoil was on display recently, with Nvidia shares falling after CEO Jensen Huang’s presentation fell short of investors’ high expectations. The stock has fallen for five consecutive sessions and, as of Tuesday’s close, is down 12% since hitting its all-time high on Jan. 6. It rose 1.7% on Wednesday.
Investors say this type of volatility is common in the region.
“NVIDIA’s stock price will always be more volatile than the market,” said Joanne Feeney, portfolio manager and partner at Advisors Capital Management, who raised her price target earlier this week. “We believe the company has experienced well-above-average revenue growth over multiple years, which we believe explains and sustains the valuation.”
Nvidia stock is expected to rise about 30% over the next year, according to average analyst price targets compiled by Bloomberg. That would give the company a market value of more than $4 trillion, potentially dwarfing its closest peers Apple and Microsoft. The company’s sales are expected to reach $129 billion for the current fiscal year, which ends Jan. 30, up from $27 billion two years ago.
However, there are many potential dangers ahead. Here are the biggest problems Nvidia faces next year.
Spending on AI
Nvidia’s stock price rise ultimately hinges on demand for its AI services. Nearly half of the company’s revenue comes from a handful of tech giants that are rushing to add computing power. Capital spending by Microsoft, Amazon.com, Alphabet and Meta Platforms is expected to reach a combined $257 billion this fiscal year, up from $209 billion in 2024. And customers aren’t seeing the big sales they expected from AI.
“At some point new applications will need to accelerate revenue for other companies to sustain this investment,” said one of just eight of the 78 analysts tracked by Bloomberg. said Gil Luria, director of technical research at DA Davidson. The stock does not have a buy rating.
Outside of hardware manufacturers like Nvidia, the most notable AI revenue growth has come from large web service providers like Amazon, Google Cloud, and Microsoft’s Azure. However, it is still a relatively small amount compared to the amount that companies spend on technology development.
So far, few of the tech giants’ cloud computing customers have realized significant revenue increases from AI. Salesforce.com’s stock price has been rising on high expectations for its new AI products, but the customer relationship management software company’s sales have not yet grown significantly. Palantir Technologies, which makes data analytics software, said its AI services are driving revenue growth.
“It is imperative that hyperscaler customers begin to generate meaningful profits,” Luria said.
competition
Nvidia has a virtual monopoly on AI accelerators and is trying to stay ahead of competitors by accelerating the pace of rollout of new chip lines. Its latest creation, Blackwell, initially faced manufacturing challenges that delayed its release. But Huang said the company is currently in full production and plans to start shipping this quarter, adding that demand for Blackwell is “very strong” and that he expects it to outstrip supply for several quarters.
Advanced Micro Devices Inc. is probably Nvidia’s closest competitor. However, the more than $5 billion in AI accelerator sales expected in 2024 is only a fraction of the $114 billion in data center sales that Nvidia expects this year. Intel is struggling to rebuild, with sales slowing due to lower-than-expected orders for AI accelerators and the company saying it will fall short of its 2024 goal of $500 million, with further delays expected. is taking.
Meanwhile, chipmakers Broadcom and Marvell Technology are gaining momentum with sales of custom-made semiconductors and network components used in data centers. Broadcom said in December that it predicted the market for the AI components it designs could reach up to $90 billion by fiscal 2027, sending its stock soaring and preventing so-called ASIC chips from taking market share from Nvidia. There are growing concerns about this.
But Morgan Stanley analysts led by Joseph Moore say these custom chips are unlikely to cause a big blow to Nvidia, given Blackwell’s significant technological advances.
“Directly competing with Nvidia on cluster-level specifications will likely continue to be a challenge,” they wrote in December.
And its biggest customers are chip makers, who are rushing to develop their own chips to avoid Nvidia’s high prices. Amazon has started shipping the second generation of Trainium, and aims to connect up to 100,000 chips in clusters. Alphabet Inc.’s Google started developing AI chips a decade ago, and the latest version is expected to be widely available this year. Microsoft Corp. announced an accelerator and central processing unit called Maia in late 2023.
evaluation
How much investors are willing to pay for Nvidia stock will depend on the company’s growth prospects. The outlook looks positive for now, as customers plan to increase their spending on hardware and competition is still playing catch-up. The company’s stock is priced at about 31 times expected earnings over the next 12 months, below the 10-year average of 34 times, according to data compiled by Bloomberg.
Still, that valuation requires Nvidia’s profits to remain strong as growth slows and higher costs associated with Blackwell’s development are expected to weigh on margins. Nvidia’s revenue is expected to grow 112% in fiscal 2025, 53% in fiscal 2026, and 21% in fiscal 2027. Gross margin for the current quarter is expected to be 73%, down from 75% in the prior quarter. Nvidia said in November. However, the company expects profit margins to recover once production increases.
It all adds up to a fair price for a company as fast growing as NVIDIA, said Scott Yuschak, managing director of equity strategy at Truist Advisory Services.
“There is still plenty of growth left in Nvidia in 2025, and there are still reasons to be interested in this stock,” Yushak said. “Still, that number depends on increasingly large spending. Any sign of a slowdown in AI spending will cause the price investors are willing to pay for Nvidia stock to fall.”
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Earnings deadline is Wednesday
–With assistance from Ryan Vlastelica, Subrat Patnaik, and Brandon Harden.
(Updates to the market have been released.)
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