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Shares of Nvidia (NVDA) have more than tripled this year due to the artificial intelligence (AI) frenzy. However, the extreme bullish expectations that have been priced into the stock also make it unlikely that the rally in Nvidia can continue at a torrid pace. Shares of Nvidia barely budged and have been range-bound in the second half of this year even after the last two earnings reports showed profit and revenue exceeded sky-high expectations.
Analysts remain overwhelmingly positive on Nvidia, with a 37% upside seen in the stock price over the next 12 months. However, that is significantly below this year’s gains. Some analysts are concerned that Nvidia’s current growth trajectory isn’t sustainable over the long term. Edward Jones last week downgraded Nvidia to the equivalent of neutral and said, “With exceptionally strong demand and no real alternatives for its products, we believe Nvidia is experiencing peak demand, and this will make it more challenging for the company to continually outpace expectations and drive the stock meaningfully higher.”
Extremely bullish expectations for Nvidia may signal that most of the upside is already priced into the stock. For the year ending in early 2025, estimated adjusted earnings per share are about $20, more than double what analysts were forecasting just six months ago. Also, most funds and investors already own Nvidia, presenting another challenge for further share-price gains. An analysis by Morgan Stanley of the top 100 actively managed institutional portfolios in Q3 showed the average portfolio concentration of Nvidia was about 2.3%, well above its historical average of 0.7%.
Most analysts believe shares of Nvidia could continue higher, but the days of eye-popping rallies are over. Ingalls & Snyder said, “Everyone loves Nvidia, so more or less everyone already owns it or overweights it, and that means it will be tough to find the next incremental buyer. Shares should continue to move higher over the long term, but the days of surging 20% on very strong earnings results are over.”
There are also several risks on the horizon that could hurt Nvidia’s performance. The company’s revenue could take a hit from U.S. curbs on tech exports to China, though Nvidia is reported to be making new chips for the Chinese market that won’t run afoul of U.S. export restrictions. Also, competition is expected to heat up from rivals, including Advanced Micro Devices and customers like Microsoft. In addition, there’s also the risk of blowback against the proliferation of AI as it becomes more mainstream. Fidelity International is worried about an unexpected situation in AI that triggers a meaningful market decline, saying, “It takes just one incident for something to go wrong, and the material impact could be significant.”
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.
