Feb 22, 2024 - Business

Nvidia stock soars but must avoid "overordering cycle"

an illustration of an upward climbing arrow created out of glowing binary code

Illustration: Tiffany Herring/Axios

Nvidia's meteoric rise is yielding speculation over whether the run-up is just the beginning or whether the stock is overhyped.

Why it matters: The company's shares surged another 16% today after its blowout earnings report, but the 275% gain over the past year has some questioning whether the AI darling has entered dot-com like euphoria.

Between the lines: There's a difference between now and then, however, when investors piled into dot-com stocks around the turn of the century: Unlike many of those dot-com bubble companies, Nvidia is selling actual stuff.

  • So much, in fact, that it says it doesn't expect to be able to keep up. "We expect our next-generation products to be supply constrained as demand far exceeds supply," CFO Colette Kress said on an earnings call.
  • And while Nvidia's stock price has exploded — its up 62% on the year and is now the third most valuable company on Wall Street — many point out that its earnings have been growing even faster, keeping its trading multiple in check.

Reality check: The biggest threat to Nvidia, however, is that those same customers who are driving demand, are over-investing in chips to power unrealistic or far-too-soon AI ambitions.

  • One customer alone represents 13% of Nvidia's revenue, according to a new SEC filing.
  • "In the future, these partners may decide to purchase fewer products, not to incorporate our products into their ecosystem, or to alter their purchasing patterns in some other way," the company notes in the filing, in a statement of risks.

What they're saying: Morgan Stanley analyst Joe Moore acknowledged that Nvidia may be benefiting from "an overordering cycle," but he still raised his price target from $750 to $795.

  • Bank of America analyst Vivek Arya noted the risk of competition from the likes of AMD and custom chip suppliers, but he still raised his price target from $800 to $925.

This says a lot. Few investors have the conviction to bet against Nvidia's stock, at least for now.

  • Shorts represented only 1.12% of the company's outstanding shares as of Feb. 8, according to S&P Capital IQ.

What we're watching: "The AI Revolution starts with Nvidia and in our view the AI party is just getting started," Wedbush Securities analyst Dan Ives wrote in a research note.

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