Even Nvidia Bulls See Little Upside for Stock After AI Mania

(Bloomberg) — The market frenzy around artificial intelligence has lifted Nvidia Corp.’s stock so much that even many bullish analysts don’t see it going much further.

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The chipmaker’s shares have almost doubled from their October low, closing Thursday at $223.37. But analysts see the stock dropping 9% in the next year to $204.19, based on their average price targets. The company is valued at 51 times projected earnings, much higher than its average multiple of 30 over the past decade.

The excitement surrounding AI was sparked by the massive popularity of OpenAI’s ChatGPT tool. Now everyone wants in on the action and top investors are flocking to Nvidia as it dominates the market for graphics chips designed for complex computing tasks needed to power AI applications. But expectations now may be too high, as the price target and earnings multiple show.

“Nvidia is trading rich from a valuation perspective,” said Greg Bassuk, chief executive officer at AXS Investments in New York. “There is room for some multiple compression in the weeks and months ahead.”

While Nvidia has built a multibillion-dollar server business in the last few years, it still depends heavily on the market for personal computers, where gamers use its cards to get the most realistic experience. Earnings reports from Intel Corp. and Advanced Micro Devices Inc. showed that demand in those markets has collapsed amid an excess of inventory, and the companies indicated that orders won’t improve until the second half of this year.

Nvidia reports on Feb. 22, and analysts have been getting more pessimistic, cutting their estimates for fourth-quarter adjusted earnings per share by 26% over the past six months and reducing their revenue outlook by 22%.

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Yet, price targets and earnings estimates aside, Wall Street remains bullish: The stock has 37 buy ratings, 12 holds and only two sells. Of the analysts who recommend purchasing the stock, 15 have targets that are below the current price, indicating that they will either be raising their targets or cutting their ratings in the coming days.

It is hard to know for sure “how much does ChatGPT drive incremental inference demand,” Morgan Stanley analyst Joseph Moore wrote in a note. “Do think this is the number that is being consistently overestimated,” he said.

Some bulls are willing to look past the current weakness and AI mania.

“The stock is attractive at current levels,” said Daniel Flax, senior research analyst at Neuberger Berman. “The near term remains challenging, but the key for a company like Nvidia is to be able to innovate, execute on its product cycles and deliver value for its customers. If it’s able to do that, I think it will be able to create additional shareholder value over time.”

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–With assistance from Ian King.

(Adds analyst comment in paragraph 8, updates stock moves to market open.)

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