'Nvidia's 6x Surge, Correction Theory... "Potential Demand Slowdown and Emergence of Competitors"'

Shares of Nvidia, a key player in artificial intelligence (AI) semiconductors, have surged more than sixfold since last year, prompting analyses that the stock is excessively overvalued. On the 26th (local time), Bloomberg reported, “Even traders optimistic about the AI wave are weighing the potential for further gains in Nvidia’s stock with concern.”

[Image source=Yonhap News]

Following the launch of OpenAI’s generative AI ‘ChatGPT’ last year, Nvidia’s stock price more than tripled that year and has risen over 90% so far this year. Nvidia’s market capitalization surged by $2 trillion during the same period. High-performance graphics processing units (GPUs), which can rapidly handle numerous mathematical operations, are essential for building generative AI, and Nvidia virtually monopolizes this market.

However, the investment industry is concerned that future earnings are already heavily priced into the stock. Peter Bookvar, Chief Investment Officer at the U.S. investment advisory firm Bleakley Financial Group, pointed out, “In cases like Nvidia’s, future profits over the coming years are reflected in the stock price within a very short period,” adding, “Fundamentals take a backseat.”

Currently, Nvidia’s forward price-to-earnings ratio (PER) stands at 37 times. At the beginning of this year, Nvidia’s forward PER was 25 times. The forward PER is calculated by dividing the current stock price by the expected total earnings per share (EPS) over the next 12 months. The investment industry generally analyzes that the higher the forward PER, the greater the likelihood of a stock price correction.

Bloomberg also noted the uncertainty about how long the popularity of advanced semiconductors, which are experiencing shortages, will last. This is because the semiconductor industry goes through cycles of boom and bust. Bloomberg reported, “Advanced semiconductors like Nvidia’s processors take more than three months to manufacture, and even then, orders must be placed months in advance,” explaining, “This is why companies inevitably face unstable demand forecasts.”

Another factor for potential stock price adjustment is Nvidia’s AI semiconductor sales structure, which heavily depends on big tech companies such as Microsoft, Meta Platforms, Amazon, and Alphabet. Jeffrey Mullenkamp, portfolio manager at Mullenkamp & Company, predicted, “If Nvidia’s major big tech customers stop generating profits after building AI infrastructure, additional demand will not arise.”

The emergence of competitors is also a variable. Logan Perk, an analyst at Edward Jones, said, “Nvidia’s profit margins are very high, so competitors are bound to emerge.”

For example, latecomer AMD launched an AI accelerator at the end of last year and is expected to generate $3.5 billion in sales in this field this year. Intel produces various in-house AI semiconductors. Microsoft (MS) and Amazon are also working on their own semiconductor designs.

Of course, Wall Street’s opinion on Nvidia remains overwhelmingly optimistic. Nvidia’s revenue doubled in the fourth quarter of the 2023 fiscal year (October last year to January this year) and is expected to increase by 81% this year as well.

There is also a counterargument that global demand for AI semiconductors is still in its infancy. This is because demand is expected to flood in from governments worldwide and industries such as pharmaceuticals, shipbuilding, and automotive sectors in the future.