Nvidia (NVDA), the world’s leading AI chipmaker, has seen its market value increase by 2,742% over the past five years. Based on these tremendous gains, Wall Street analysts are divided on the outlook for Nvidia stock today. While some analysts argue that Nvidia’s valuation is expensive, others argue that the company still has a long way to go to grow, justifying its premium valuation. I am neutral on the outlook for Nvidia stock because I believe that its current valuation reflects the economic realities facing the company.

Analyst optimism about innovation and market dominance

Nvidia still has the support of analysts who believe in its innovation and market competitiveness. For example, Morgan Stanley (MS) recently upgraded its rating on Nvidia and set a price target of $144, citing their confidence in the company’s ability to remain at the forefront of the AI ​​chip industry.

Blackwell’s chips, which are faster and more versatile than existing AI chips, are expected to attract strong demand from major tech companies, such as Amazon (AMZN) and Microsoft (MSFT), as they accelerate their AI investments.

Each Blackwell chip is expected to cost between $35,000 and $50,000, which will positively contribute to Nvidia’s profit margins, as the H100 and H200 chips – currently Nvidia’s best-selling products – cost between $25,000 and $40,000.

Analysts at Edward Jones also recently pointed out that Nvidia’s massive share of the AI ​​chip market and its comfortable lead in the GPU market highlight the company’s competitive advantages.

Nvidia has successfully transitioned from a gaming-focused chip developer to a data center-focused developer. This new focus has allowed the company to broaden its horizons and capitalize on the growing demand for data center GPUs. The CUDA platform, a cross-domain AI development standard that enables developers to optimize processor performance while easily creating robust AI applications, has also been a growth driver of late and is expected to contribute positively to Nvidia’s growth going forward.

According to many Wall Street analysts, Nvidia’s ability to attract and retain engineering talent is also a key differentiator, as it keeps the company at the forefront of innovation.

Concerns about growth, sustainability and appreciation

While analysts are generally positive on Nvidia stock, some question the sustainability of its earnings growth and current valuation levels. New Street Research, for example, recently downgraded Nvidia due to its stretched valuation. New Street analyst Pierre Ferragu believes there will be limited upside from here unless Nvidia significantly improves its outlook after 2025, which is unlikely to happen anytime soon.

The story continues

Nvidia is currently valued at a forward price-to-earnings ratio of 47x. This does not indicate overvaluation, but this could change if growth slows in the near future.

Analyst Gil Luria of DA Davidson is pessimistic about Nvidia, as he believes that demand for Nvidia’s GPUs will wane over the next 18 months as tech giants like Amazon and Meta Platforms (META) are likely to develop their own chips. Barclays (BCS) analyst Blayne Curtis also recently noted that Nvidia’s long-term outlook isn’t as rosy as it seems, as some of its largest customers are already looking for a solution to reduce their reliance on Nvidia chips.

Beyond analyst comments

Nvidia enjoys competitive advantages, as evidenced by its industry-leading gross margin and market share. According to Mizuho Securities, Nvidia controls between 70% and 95% of the AI ​​chip market, giving it pricing power. In the most recent quarter, Nvidia’s gross margins were 78%, compared to just 41% for Intel (INTC) and 51% for Advanced Micro Devices (AMD).

These competitive advantages will help Nvidia report strong profit growth in the coming quarters, but there are some risks looming on the horizon. Last November, Nvidia CEO Jensen Huang admitted at the DealBook Summit that he wakes up every morning fearing the company will go bankrupt due to increasing competition.

AMD is trying to grab a slice of the growing data center market with its Radeon Instinct GPUs, and the company’s 2022 acquisition of Xilinx has helped it gain traction in AI and machine learning. Intel is also making inroads into the data center market with its Habana Gaudi AI processors, which are designed to compete with Nvidia’s data center GPUs.

The biggest threat to Nvidia’s dominance in AI comes from the big tech giants who are focused on reducing their reliance on Nvidia’s products.

Google, which wants to be self-sufficient when it comes to sourcing advanced AI chips, has developed its own AI chip series called Tensor Processing Units. These chips are already in use in Google’s data centers. Amazon has also developed its own AI chips called Inferentia and Trainium, aimed at AWS customers who use Nvidia GPUs for AI applications. Apart from these tech giants, Microsoft and Meta have also announced investments in their own AI chips.

What is the price target for NVDA shares?

Based on ratings from 41 Wall Street analysts, NVDA shares come in as a Strong Buy, with 37 Buy ratings and four Holds. The average Nvidia stock price target is $140.85, implying an upside potential of 11.5% from the current market price.

The bottom line: Nvidia seems fairly valued

Nvidia enjoys competitive advantages, which justify the premium valuation at which it trades. However, competition in the AI ​​chip market is expected to increase dramatically in the coming years, with rival chipmakers and major tech companies aggressively investing in AI chips to capture a share of this booming market. Given this looming threat, Nvidia appears fairly valued today, with no margin of safety to attract new investors at its current stock price.

Revelation

EMEA Tribune is not involved in this news article, it is provided by our partners and/or the news agencies. Copyright and Credits go to the news agencies, email [email protected] Follow us WhatsApp verified channel