NVIDIA's $3 trillion share price rises strongly, but Wall Street remains calm

(Bloomberg) -- Nvidia Corp.’s market value has risen by $3 trillion in the two years since ChatGPT sparked the artificial intelligence craze, a bigger gain than any stock in history in such a short period of time. But things are changing now for the chipmaker.

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Competitors and customers are stepping up efforts to gain a larger share of the artificial intelligence chip market. The industry's rapid revenue growth is slowing. The Biden administration is seeking to limit overseas sales of Nvidia's most advanced chips, although it's unclear how President-elect Donald Trump's incoming administration will approach the issue.

Sound scary? None of these risks has stopped investors from betting that Nvidia's stock price will add hundreds of billions of dollars in market value by 2025 as spending on artificial intelligence computing surges.

“I’m not worried that Nvidia has peaked,” said Kevin Mahn, chief investment officer at Hennion & Walsh Asset Management. “There’s still more growth, although we should also see more volatility. The AI revolution is going to be a long haul. The road is full of thorns.”

That turmoil has been on display recently, with Nvidia shares tumbling after CEO Jensen Huang's speech fell short of investors' high expectations. The stock has fallen for five consecutive sessions and is down 12% since hitting an all-time high on Jan. 6 (as of Tuesday's close). It rose 1.7% on Wednesday.

Investors say this volatility comes with it.

"Nvidia stock has always been more volatile than the market," said Joanne Feeney, a portfolio manager and partner at Advisors Capital Management, which raised its price target on the stock earlier this week. "We think its earnings growth has been well above average over the years, and we do think that's what explains and sustains the valuation."

Nvidia shares are expected to rise about 30% in the next year, according to the average analyst price target compiled by Bloomberg. That would give the chipmaker a market capitalization of more than $4 trillion, potentially dwarfing its closest peers Apple Inc. and Microsoft Corp. Its revenue is expected to hit $129 billion for the fiscal year ending 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:

AI spending

Nvidia's rise ultimately depends on demand for artificial intelligence services. Nearly half of its revenue comes from a handful of tech giants eager to add computing power. Capital spending by Microsoft, Amazon, Alphabet Inc. and Meta Platforms Inc. is expected to reach $257 billion this fiscal year, up from $209 billion in 2024. Of course, those plans could change if the companies' capital spending changes. Their customers are not getting the big sales they expected from AI.

"At some point, we need to see new applications driving other companies' revenue acceleration to continue making this investment," said Gil Luria, director of technology research at DA Davidson, a Bloomberg analyst. One of only 8 analysts out of 78 it follows. There is no buy rating on the stock.

In addition to hardware manufacturers such as Nvidia, the most obvious growth in artificial intelligence revenue comes from large network service providers such as Amazon, Google Cloud and Microsoft Azure. However, this figure is still relatively small compared to how much the company spends on technology development.

So far, few of the tech giants' cloud customers have seen significant revenue growth from artificial intelligence. Salesforce.com Inc. shares rose on high hopes for new artificial intelligence products, but the customer relationship management software company has yet to see much sales growth. Palantir Technologies Inc., which makes data analysis software, said its artificial intelligence services are driving revenue growth.

"Hyperscale customers have to start generating meaningful returns," Luria said.

competition

Nvidia has a near-monopoly in artificial intelligence accelerators and is trying to maintain a competitive advantage by accelerating the pace of launching new chip families. Its latest product, Blackwell, initially faced manufacturing challenges that slowed its release. But Huang said the product is now in full production and will begin shipping this quarter, adding that demand for Blackwell is "very strong" and expected to outstrip supply within several quarters.

Advanced Micro Devices Inc. is probably Nvidia's closest competitor. But it expects artificial intelligence accelerator sales to exceed $5 billion in 2024, and Nvidia expects data center revenue to reach $114 billion this fiscal year, which is just the tip of the iceberg. Embattled Intel Corp. lagged even further as weaker-than-expected orders for its artificial intelligence accelerator prevented the company from hitting its sales target of $500 million in 2024.

Meanwhile, chipmakers Broadcom Inc. and Marvell Technology Inc. are building momentum in sales of custom semiconductors and networking components used in data centers. Broadcom predicted in December that the market for artificial intelligence components it designs would reach $90 billion by fiscal 2027, sending its stock soaring and raising concerns that so-called ASIC chips could steal share from Nvidia.

However, Morgan Stanley analysts led by Joseph Moore said that given Blackwell's significant technological advancements, these custom chips are unlikely to do much harm to Nvidia.

"Competing directly with Nvidia on cluster-level specifications may remain a challenge," they wrote in December.

Then there are the chipmaker's largest customers, which are scrambling to develop their own semiconductors to avoid Nvidia's high prices. Amazon has started shipping its second-generation Trainium, which it aims to string together into clusters of up to 100,000 chips. Alphabet's Google began building artificial intelligence chips a decade ago, and the latest version is expected to be widely available this year. Microsoft launched an accelerator and a central processing unit called Maia in late 2023.

Valuation

How much investors are willing to pay for Nvidia stock depends on its growth prospects. That view looks bright right now as customers will spend more on hardware while competition continues to catch up. The stock is priced at nearly 31 times expected profits over the next 12 months, below the 34 times average over the past decade, according to data compiled by Bloomberg.

Still, that valuation would require Nvidia's profits to continue growing as growth slows and rising costs associated with Blackwell development are expected to impact margins. Nvidia's sales are expected to grow 112% in fiscal 2025, 53% in fiscal 2026, and 21% in fiscal 2027. Its gross profit margin is expected to drop to 73% this quarter, down from 75% in the previous fiscal year. Nvidia said in November. However, it expects margins to rebound when production ramps up.

It all adds up to a reasonable price for a fast-growing company like Nvidia, said Scott Yuschak, managing director of equity strategy at Truist Advisory Services.

"Nvidia still has a lot of room to grow into 2025 and there's still reason to be interested in the stock," Yuschak said. "However, that number is predicated on larger and larger spending. If there's any slowdown in AI spending, Signs that the price investors are willing to pay for Nvidia stock will fall."