News
Why Nvidia’s ‘Gravy Train’ Could Come to a screeching halt after a week of volatile trading
from Nvidia (NVDA) shares have soared this week, as shares reversed direction from all-time highs and Wall Street continued to debate how much more the chip giant can add to its record rally.
“The sharp rise in stocks makes them vulnerable to profit-taking, but we argue that any volatility [is] will likely be short-lived,” Bank of America wrote on Thursday. The bank reiterated its buy rating and $150 price target, calling Nvidia a “top pick.”
The chipmaker, which briefly dethroned Microsoft (MSFT) as the most valuable company in the world on Tuesday, saw its market value fall on Friday to about $3.12 trillion, below Microsoft’s $3.33 trillion.
Patrick Moorhead, founder and CEO of Moor Insights & Strategy, told Yahoo Finance on Friday that investors should watch for signs of a pullback.
While he said he doesn’t see the status quo of Nvidia’s dominance changing in the next six to nine months, investors should focus on “the downstream profitability that people in the ecosystem are getting or not getting.”
“These are the software companies like Adobe, Salesforce, SAP, and ServiceNow. Because if these companies and these consumers don’t pay more for these new AI capabilities, then this whole gravy train will come to a screeching halt, as we saw with the internet collapse,” he explained.
Increased competition could also serve as a drag on pricing power, Moorhead warned, as Nvidia competes not only with “commercial silicon suppliers” like AMD (OMG) and Intel (INTC), but also “homemade” from Amazon’s AWS (AMZN), Microsoft’s Azure (MSFT) and Google (GOOG, Google).
Chairman and CEO of Nvidia Corporation, Jensen Huang, delivers a speech during the Computex 2024 exhibition in Taipei, Taiwan, Sunday, June 2, 2024. (AP Photo/Chiang Ying-ying) (ASSOCIATED PRESS)
The wave of investment in AI has continued to increase optimism regarding Nvidia’s growth rate. In its latest quarterly report, the company reported adjusted earnings which increased 461% year over year, while revenue grew 262%.
In addition to stellar earnings, Nvidia also completed a 10-to-1 split on June 10 and doubled its quarterly cash dividend – a move that has been echoed by other tech giants in recent quarters.
Nvidia shares are up about 200% in the last 12 months and more than 3,200% in the last five years. Year to date, Nvidia has gained about 160%.
But despite its very high rating, the $4 trillion case has been building.
“I don’t see any reason it can’t reach $4 trillion,” Moorhead said. “A lot of this is based on expectations because you look at the price-to-earnings ratio, it’s pretty astronomical. And if we can see some positive signals from downstream players… [I] I don’t see any reason why this can’t reach $4 trillion.”
The story continues
Wedbush analyst Dan Ives agreed, writing in a note to clients on Thursday: “We believe that next year the race to a $4 trillion technology market cap will be front and center between Nvidia, Apple and Microsoft.”
Ives said the AI revolution is a party that is “just getting started,” driven by the pace of tech giants’ spending on data centers. He expects incremental spending on AI to reach $1 trillion in the next decade, with more than 70% of companies following the AI use case path.
“It’s 9pm at a party that goes until 4am with the rest of the tech world now joining in,” he said.
Alexandra Canal is a senior reporter at Yahoo Finance. Follow her on Twitter @allie_canal, linkedin, and email her at alexandra.canal@yahoofinance.com.
Click here for the latest stock market news and in-depth analysis, including events moving stocks
Read the latest financial and business news from Yahoo Finance