Nvidia’s (NASDAQ:NVDA) stock has surged 223% over the past year.
This has led to a very high relative valuation, which may concern some investors. Indeed, trading at more than 100-times earnings and 33 times sales, NVDA stock appears overvalued compared to its 2022 levels.
Now, for current NVDA shareholders, especially those who bought at the highs around $500 per share, this might feel like the end of Nvidia’s hot streak.
The AI chip stock surged more than three-fold from January to August, but recently, enthusiasm has waned.
For those considering buying NVDA stock on the dip, here’s what to watch.
Recent NVDA News
For artificial intelligence bulls, this recent news ought to be exciting. Infosys and NVIDIA recently extended their partnership to enhance enterprises’ productivity through generative AI applications.
This collaboration integrates Nvidia’s AI Enterprise ecosystem with Infosys Topaz, enabling the creation of customer-friendly generative AI solutions for businesses worldwide.
Infosys and Nvidia have extended their partnership to enhance enterprises’ productivity through generative AI applications.
This collaboration integrates Nvidia’s AI Enterprise ecosystem with Infosys Topaz, enabling the creation of customer-friendly generative AI solutions for businesses around the world.
As Nvidia looks to continue building out its dominant AI moat, these sorts of collaborations and partnerships are worth paying attention to.
For now, I’d put this deal down as something to keep an eye on, but the company’s overall progress in this space has been incredible.
The Catalyst Is Starting to Boil
Aside from AI, there’s plenty to like about Nvidia’s recent momentum in its data center business.
This sector has boomed, representing over 70% of the company’s revenue in the first half of fiscal 2024. In Q2 alone, data center accounted for 76% of the top line, driven by high demand for AI GPUs.
Nvidia’s H100 processors are in high demand, facing extended wait times and prices ranging from $40,000 to potentially over $70,000.
The company’s dominant market share in AI processors, estimated at over 80% and possibly exceeding 90%, has been a major driver of its data center business growth in the current fiscal year.
The Financial Times projects Nvidia to potentially generate $22 billion in revenue in 2023, with the sale of around 550,000 H100 GPUs at an estimated average price of $40,000 per unit.
Nvidia offers other data center chips like the Grace server processor and A100 data center GPU, which could contribute to higher revenue in fiscal 2024.
This suggests a significant potential increase in Nvidia’s data center revenue in the second half of the fiscal year, in line with its fiscal Q3 revenue guidance of $16 billion, representing a 170% year-over-year increase, with a substantial portion likely coming from the data center segment.
Nvidia is Overvalued, But So Are Other Chip Stocks
Investors are growing cautious about U.S. semiconductor stocks, including Nvidia, after their remarkable 2023 rally, considering high valuations and rising Treasury yields.
Semiconductor shares surged, but Nvidia, in particular, stood out, tripling its value and crossing the $1 trillion market cap threshold due to its AI products.
Semiconductor stocks saw a surge in valuations this year, with stocks in the S&P 500 semiconductor sector trading at 28.5-times forward earnings estimates in July, compared to its 10-year average of 16.5-times.
Despite recent declines, this index still trades at 23.5-times forward earnings. The pandemic and growing interest in AI innovation contributed to this trend.
What Now
After excessive optimism around NVDA stock, the market appears to be swinging toward the other extreme. Any negative development (even a minor earnings miss or prolonged high interest rates) could trigger a selloff.
While Nvidia may not return to pre-ChatGPT prices, shares could drop moderately below current levels.
Eventually, macro factors will stabilize, and growth forecasts may become more conservative, setting the stage for potential out-performance.
However, the question of which direction NVDA stock is headed from here is a good one. I’m partial to say higher over the long-term, and lower over the shorter-term, but we’ll see.
On the date of publication, Chris MacDonald did not have (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.