Nvidia’s $3 trillion rally is over, Wall Street is no stranger to it

(Bloomberg) — Nvidia Corp.’s $3 trillion market value surge. in the two years since ChatGPT helped spark an AI frenzy is bigger than any stock rally in such a short period of time in history. But now the landscape is changing for the chipmaker.

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Competitors and customers are stepping up efforts to capture a larger share of the AI chip market. The industry’s strong revenue growth is slowing. The Biden White House is seeking to limit the sale of Nvidia’s most advanced chips abroad, though it’s unclear how the incoming administration of President-elect Donald Trump will handle that.

Does it sound scary? None of those risks are deterring investors from betting that Nvidia’s rally could add hundreds of billions of dollars more in market value by 2025 as the deluge of AI computing spending continues to gain steam.

“I’m not concerned that we’ve seen a spike in Nvidia,” said Kevin Mahn, chief investment officer at Hennion & Walsh Asset Management. “There is more growth, although we should also see more volatility. The AI revolution will be a long road with many potholes.”

That turmoil has been on display recently, with Nvidia shares falling after a presentation from CEO Jensen Huang fell short of investors’ high expectations. The stock fell for five straight sessions, losing 12% since hitting a record high on Jan. 6, as of Tuesday’s close. It rose 1.7% on Wednesday.

Investors say these kinds of changes come with the territory.

“Nvidia stock is always going to be much more volatile than the market,” said Joanne Feeney, portfolio manager and partner at Advisors Capital Management, who raised her price target on the stock earlier this week. “We see it as having several years of well-above-average earnings growth, and we see that as explaining and maintaining the valuation.”

Shares of Nvidia are expected to rise about 30% over the next year, according to the average of analysts’ price targets compiled by Bloomberg. That would give the chipmaker a market value of more than $4 trillion, potentially dwarfing its closest peer Apple Inc. and Microsoft Corp. Its revenue is expected to reach $129 billion in its current fiscal year, which ends Jan. 30, up from $27 billion. two years ago

That said, there are many potential dangers ahead. Here are the biggest issues facing Nvidia in the coming year:

Spending on AI

Nvidia’s rally ultimately depends on demand for AI services. Nearly half of its revenue comes from a handful of tech giants rushing to add computing capacity. Capital expenditures by Microsoft, Amazon.com Inc., Alphabet Inc. and Meta Platforms Inc. reach a total of $257 billion in the current fiscal year, up from $209 billion in 2024. Of course, those plans could change if companies and their customers aren’t generating the big sales they expected from AI .

“At some point we’re going to have to see new applications driving the acceleration of other companies’ revenue for that investment to continue,” said Gil Luria, head of technology research at DA Davidson and one of only eight of 78 analysts tracked by Bloomberg which does not have a buy rating on the stock.

Outside of hardware makers like Nvidia, the most visible AI revenue growth comes from big web service providers like Amazon, Google Cloud and Microsoft’s Azure. However, it is still a relatively small amount compared to how much companies spend on technology development.

So far, few of the tech giants’ cloud computing customers are seeing significant revenue growth from AI. Shares of Salesforce.com Inc. have increased with high expectations for new AI offerings, but the customer relationship management software company has yet to see a big uptick in sales. Palantir Technologies Inc., which makes data analytics software, has said its AI services are driving revenue growth.

“It is imperative that hyperscaling customers start generating meaningful returns,” said Luria.

competition

Nvidia has a virtual monopoly on AI accelerators and is trying to stay ahead of the competition by accelerating the pace of releasing new chip lines. Their latest, Blackwell, initially faced manufacturing challenges that slowed its release. But Huang said it is now in full production and will begin shipping in the current quarter, adding that demand for the Blackwell is “very strong” and is expected to outstrip supply for several quarters.

Advanced Micro Devices Inc. is probably Nvidia’s closest competitor. But its projected AI accelerator sales of more than $5 billion in 2024 are just a fraction of Nvidia’s projected data center revenue of $114 billion in its current fiscal year. Intel Corp., in the midst of a troubled turnaround, is further behind as weaker-than-expected orders for AI accelerators have led to sales that the company says will fall short of its target of $500 million by 2024.

Meanwhile, chipmakers Broadcom Inc. and Marvell Technology Inc. are gaining momentum in sales of semiconductors and custom-made network components used in data centers. Broadcom forecast in December that the market for the AI components it designs will reach $90 billion by fiscal 2027, sending its shares higher and raising concerns that so-called ASIC chips could take away some of Nvidia’s.

However, these custom chips are unlikely to hurt Nvidia much, given Blackwell’s significant technological advance, according to Morgan Stanley analysts led by Joseph Moore.

“Competing directly with Nvidia on cluster-level specs will likely remain a challenge,” they wrote in December.

And then there are the chipmaker’s biggest customers, who are scrambling to develop their own semiconductors to avoid Nvidia’s high prices. Amazon has begun shipping the second generation of Trainium, which aims to group up to 100,000 chips into clusters. Alphabet’s Google started building an AI chip a decade ago, and the latest edition is expected to be widely available this year. Microsoft Corp. announced an accelerator called Maia and a central processing unit in late 2023.

Valuation

How much investors will pay for Nvidia stock comes down to its growth prospects. With customers willing to spend more on hardware and competition still playing catch-up, that vision seems bright right now. The stock is priced at nearly 31 times projected earnings over the next 12 months, below the past decade average of 34 times, according to data compiled by Bloomberg.

Still, that valuation requires Nvidia’s profits to continue rising at a time when growth is slowing and higher costs related to Blackwell’s development are expected to weigh on margins. Nvidia’s sales are expected to rise 112% in fiscal 2025, 53% in fiscal 2026 and 21% in fiscal 2027. Its gross margin is expected to fall to 73% in current quarter, below 75% of the previous period. Nvidia said in November. However, he expects margins to pick up when production picks up.

For a company that’s growing as fast as Nvidia, it’s all about a fair price, according to Scott Yuschak, managing director of equity strategy at Truist Advisory Services.

“There’s still plenty of growth left for Nvidia in 2025, and there’s still reason to be interested in the stock,” Yuschak said. “However, this number is dependent on ever-increasing spending. If there are signs of a slowdown in AI spending, the price investors are willing to pay for Nvidia stock will fall.”