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Nvidia receives rare downgrade due to valuation concerns after recovery
(Bloomberg) — Nvidia Corp.NVDA) the rapid rally since early last year has finally run out of room to run, according to New Street Research analyst Pierre Ferragu.
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Ferragu downgraded the AI-focused chipmaker to neutral from buy, writing that the stock is “fully valued” after surging 154% this year, plus a nearly 240% gain in 2023. The stock fell 1.9% on Friday, compared with a 1% gain for the Nasdaq 100 Index.
The additional increase “will only materialize in an optimistic scenario, in which the outlook beyond 2025 increases materially, and we are not yet convinced about that scenario coming to fruition,” Ferragu wrote.
While the “quality of the franchise is intact,” there is “if anything, a downside risk” if the current outlook remains unchanged, he added.
Nvidia is the second-best performer among S&P 500 components this year, behind Super Micro Computer Inc (SMCI), another favorite among AI investors. The surge added nearly $1.9 trillion to Nvidia’s market cap and briefly resulted in it claiming the title of the world’s largest company.
Analyst downgrades are rare for a company that has become the biggest beneficiary of the boom in artificial intelligence spending. Nearly 90% of analysts tracked by Bloomberg recommend buying the stock. However, valuation is often cited as a concern. Nvidia trades at more than 22 times estimated revenue for the next 12 months, making it the most expensive stock in the S&P 500 Index by that measure.
New Street set a one-year price target of $135 on Nvidia, compared with its Friday close of $125.82.
In addition to Nvidia, New Street is positive on Advanced Micro Devices Inc. (AMD) and Taiwan Semiconductor Manufacturing Co (TSM) Ltd., citing its growth trends and valuations.
AMD and TSMC are “the best names to own in the group, offering strong upside potential in both our base and high-case scenarios,” New Street said in a note, adding that among other stocks with AI exposure, Broadcom Inc., Arista Networks Inc. and Micron Technology Inc. all “remain attractively valued.”
(Updates stock movements to market close.)
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