Can Nvidia Repeat Its Incredible 2023 Performance in 2024?

Stock Market

This year was certainly one for the books for Nvidia (NASDAQ:NVDA) stock. The graphics processing unit maker seized upon artificial intelligence like no one’s business and didn’t let go. NVDA stock soared 237% in 2023 and was the best-performing stock amongst the so-called Magnificent 7 stocks.

Yet 2024 might be more of a challenge. Investors will want to use caution before buying shares. There’s no question Nvidia stock is a good, long-term pick, but at these levels the chipmaker is priced for perfection.

AI and NVDA Stock

AI set Nvidia’s business soaring. Revenue is up 85% year to date and growth is accelerating. Sales tripled in the third quarter and profits increased even more. Net income is up six-fold over the first nine months of the year but rose 13 times from the year ago period.

Nvidia’s performance is mind boggling at times. CEO Jensen Huang told investors that all aspects of its business “are all growth engines in full throttle.”

It all comes down to the power of AI. Or rather, the power needed by AI to process the trillions of complex bits of data it crunches. Nvidia’s chip were made for the task.

Gaming computers where Nvidia cut its teeth required the robust computational power of the semiconductor stock’s chips. Bitcoin mining found Nvidia chips had the muscle to handle the gargantuan tasks its mandated.

It was a natural leap with the advent of generative AI that Nvidia had the chops (and the chips) to perform the calculations.

The H100 chip is Nvidia’s most popular AI processor and is now available on every major cloud services platform. In response to the outsized demand, Nvidia boosted production of the processor. Now it’s developed the H200 chip.

The new design doubles the inference speed for running large-language models on them and increases it 18 times for ChatGPT-3-type models.

Too Good to Last?

The massive profits are attracting competitors. Advanced Micro Devices (NASDAQ:AMD) introduced its MI300X chip and Intel (NASDAQ:INTC) is bringing out its Gaudi3 version. Both are reportedly faster and more robust than Nvidia’s H100 and presumably will be offered at much lower cost. That could siphon customers away from Nvidia.

There are a few other headwinds as we move into 2024. Because it only designs the chips but doesn’t manufacture them, it outsources their production to Taiwan Semiconductor Manufacturing (NYSE:TSM).

But it’s not alone in demanding TSM produce AI chips. AMD, Marvell Technology (NASDAQ:MRVL), and a host of other chipmakers need chips produced as well.

TSM is running into capacity constraints. It’s only been able to meet about 80% of demand. Although it will be increasing capacity by 20% next year that’s only a stopgap measure. Another chip shortage is real possibility as demand increases to meet the new load.

How to price quality

For a stock like Nvidia that trades at 65 times earnings, 27 times sales, and 70x free cash flow, that’s a rich valuation. It assumes Nvidia can keep growing as it has. Any hiccups in the AI race could send the chipmaker’s stock tumbling.

CEO Huang also warned the impact of the export controls on chips and technology to China is murky at best. Nvidia has little visibility into how long or how deep the ban will affect its operations. China represents 20% of its data center revenue which is one of its fastest growing businesses

Investors and analysts heap accolades onto Nvidia, considering it a top-tier stock. But not at any price. Investors will find that 2024 will bring much better opportunities to buy NVDA stock than what the market is offering today.

On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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