Could Nvidia stock (NASDAQ: NVDA) fall approximately 50% from its current level of around $130 to around $65 in the near term? We believe this is a realistic possibility. Nvidia is experiencing a business boom, driven by a surge in demand for its graphics processing units, which have emerged as the de facto silicon for running artificial intelligence applications. However, multiple risks loom. These include the potential for AI training-related demand to cool;increased competition, slower growth and less favorable monetary policies have made the valuation multiples assigned by investors less attractive. We explain Nvidia’s main risks in more detail, looking at three metrics: the company’s revenue growth, profit margin, and price-to-earnings ratio, and analyzing how the stock could fall more than 50% from current levels. I will. See the counter scenario if Nvidia stock rises to $300. In fact, we believe this wide range of upside and downside potential reflects the simple fact that NVIDIA is a highly volatile stock. AI is all the rage, and quantum computing could be the next big thing. look What’s Moving D-Wave Quantum Stock?
Why profits may be under pressure
Nvidia’s revenue is growing at a breakneck pace. Nvidia’s revenue nearly tripled over the past 12 months as the company doubled down on high-speed computing using GPUs to perform more artificial intelligence tasks. However, growth is gradually slowing. Nvidia’s revenue expanded approximately 122% in the most recent quarter. In the medium term, sales may decline further compared to current levels, and growth remains likely to slow further. Here’s why:
Training models can help mitigate diminishing returns and focus on ROI.
Over the past couple of years, companies have poured enormous resources into building AI models. Currently, training these large models is a one-off task that requires significant computing power, and Nvidia’s GPUs are considered the fastest and most efficient for these tasks. Because of this, we are receiving the maximum benefit from this. However, the AI landscape may be changing. We expect the incremental performance improvement to decrease as the model grows with respect to some parameters. Apart from this, much of the internet’s high-quality data is already running through large-scale language models, so the availability of high-quality data to train models can become a bottleneck. Considering this, the AI training phase, which has been brought forward significantly, may end. The fundamental economics of the end market for GPU chips and the broader AI ecosystem are weak, and most of Nvidia’s customers may not yet generate meaningful returns on their investments. As shareholders ultimately seek higher returns, capital spending on GPU chips could cool, impacting the likes of Nvidia. Separately, if you want a smoother rise than individual stocks, consider the High Quality Portfolio, which has outperformed the S&P and returned over 91% since its inception.
Are Nvidia’s GPUs overkill for inference?
The long-term focus of AI is on inference, where trained models are used in real-world applications. This stage could open the door to alternative AI processors that are less computationally intensive and less powerful. It’s certainly possible that Nvidia will remain the clear leader in inference as well, but rivals like AMD, and maybe even Intel, are competing with chips like AMD’s MI300 chip and Intel’s Gaudi AI accelerator. It is certainly possible to gain market share with Nvidia’s top-end chips, such as the H100, may be considered overkill for simple inference tasks given their high power consumption and initial cost.
better supply and demand equations
There are signs that the large demand-supply mismatch seen in the early stages of the generative AI wave is starting to ease. Microsoft (NASDAQ:MSFT), Nvidia’s largest GPU customer, recently indicated that it no longer has GPU supply constraints. The fact that Nvidia’s largest customers have enough chips to run their AI efforts suggests that we may be well past the breakneck “fear of missing out” phase of GPU demand. . Additionally, as supply catches up and demand stabilizes due to the factors described above, NVIDIA could face pricing pressure and slower sales growth, particularly if large customers reconsider their inventory requirements.
Currently, Nvidia’s revenue is expected to more than double this year (FY2025) to around $129 billion by consensus estimates. However, if growth slows significantly to just about 10% over the next two years due to the factors mentioned above, sales could rise from about $61 billion in FY24 to only about $165 billion in FY27. There is a gender.
margin pressure
Nvidia’s margin Net profit (i.e. profit after expenses and taxes, calculated as a percentage of revenue) is on an improving trajectory, as witnessed by the company, from around 25% levels in FY19 to around 49% in FY24. has increased to. Improved economies of scale, The more favorable product mix is skewed toward complex data center products. The dashboard provides details about the various components responsible for changes in Nvidia’s net income.
However, there is a real possibility that the profit margin could drop to a level of around 35%. why? Competition from other chipmakers such as AMD is increasing and they are investing heavily to catch up in this space given the high stakes. AMD claims its new Instinct MI300X chip outperforms Nvidia’s current chip in several parameters, while Intel is also looking to enter the space with more valuable AI chips. Separately, big tech companies like Google, Nvidia’s biggest customer, are focusing on developing AI and machine learning-related silicon. Competition makes Nvidia’s current revenue growth and unusually high profit margins unsustainable. Earlier this month, Amazon announced plans to build AI ultraclusters. This is essentially a large-scale AI supercomputer built using the proprietary Trainium chipset. Amazon also sells its AI products to other companies. For example, Apple says it uses Amazon’s AI chips for certain tasks such as search. This could also pose risks to Nvidia’s business and profits. Should I sell Nvidia and buy Intel stock?
NVDA stock’s rise over the past four years has been far from consistent, with annual returns much more volatile than the S&P 500. The stock returned 125% in 2021, -50% in 2022, and 239% in 2022. 2023. In contrast, the Trefis High Quality (HQ) portfolio, which includes a collection of 30 stocks, has significantly lower volatility. And it has outperformed the S&P 500 every year over the same period. why is that? As a group, Headquarters portfolio stocks carried less risk and delivered better returns compared to the benchmark index. It’s not been a roller coaster ride, as evidenced by the performance metrics of our corporate portfolio. Given the current uncertain macroeconomic environment and potential changes in the AI landscape, what’s the downside for Nvidia stock?
How does this affect Nvidia’s valuation?
Revenue growth of approximately 1.2x from FY25 to FY2027 (up 20%), combined with margin contraction from the current 50% level to approximately 35% (down 30% from current levels, or 0.7x). , which means: Net profit could fall by about 15% by 2027, it said. As investors reevaluate Nvidia’s status as a growth stock, a 15% decline in earnings would inevitably hurt the company’s P/E ratio. Additionally, changes in US monetary policy may also have some impact on high-end tech stocks. At a meeting earlier this week, central bankers said This signaled that the pace of future interest rate cuts would slow. Policymakers have reduced the number of quarterly point cuts they expected in 2025 from an average of four in September to just two now. This could be a sign that the era of ultra-low interest rates seen throughout the coronavirus pandemic is over. if Nvidia’s PER A gradual reduction from the current level of about 44x to about 25x could send NVIDIA stock down to about $65 per share. What would be the duration of this negative return scenario? Actually, it doesn’t make much of a difference whether it takes 2 years or 3 years. If competitive threats develop and Nvidia’s GPU cash cow faces headwinds, we could see a significant correction.
Return December 2024
MTD (1) 2024
From the beginning of the year (1) 2017-24
Total (2) NVDA Return -7% 160% 1783% S&P 500 Return -3% 23% 162% Trefis Enhanced Value Portfolio -3% 21% 800%
(1) Returns as of December 19, 2024
(2) Cumulative total return since the end of 2016
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
