Over the last two years, the hype around the artificial intelligence (AI) boom has led to incredible operating momentum for Nvidia (NASDAQ: NVDA), the company that designs and manufactures most of the industry’s chips. But while business is roaring, the company’s stock price seems to have hit a roadblock. Let’s discuss why this might be happening and determine whether Nvidia’s shares can hit $200 before the end of the year.
Nvidia’s rocket-ship rally fades
With shares up by around 2,450% over the last five years, Nvidia has been a rewarding investment for its long-to-medium-term shareholders. However, the thesis is beginning to unravel, as strong operational results are no longer impressing the market as much as before.
Second-quarter revenue soared 122% year over year to $30 billion, driven by massive demand for Nvidia’s data center graphics processing units (GPUs), which help run and train AI algorithms. The company’s bottom line also remains buoyant, with operating income jumping 174% year over year to $18.6 million. Management expects the release of new AI hardware products based on the faster and more efficient Blackwell architecture to stimulate client demand in 2025 and beyond.
Nvidia’s board also approved a whopping $50 billion worth of share repurchases in the quarter, which can boost investors’ claim on future earnings by lowering the number of shares outstanding.
However, while these are objectively good results, Nvidia’s split-adjusted stock price has fallen around 10% since the release on Aug. 28, suggesting many market participants think the operational momentum is unsustainable.
Storm clouds gather over the AI industry
There are several reasons why investors might take Nvidia’s current results with a grain of salt. For starters, the consumer-facing software side of the generative AI industry is yet to prove its monetization potential. For instance, analysts at Goldman Sachs worry that today’s AI systems simply aren’t designed to solve problems complex enough to justify their costs.
And while the technology behind large language models (LLMs) like ChatGPT continues to improve, that doesn’t necessarily mean they will become easier to monetize because of competition from free, open-source rivals like Meta Platforms’ Llama or Elon Musk’s Grok.
There is a growing risk that AI could follow the pattern of previous hype cycles like the internet or electric vehicles, where corporations overbuilt capacity in anticipation of consumer demand that didn’t materialize quickly. If this happens with generative AI, the market for Nvidia’s pricey data center hardware could plateau or decline in the near term — even if the technology becomes widely adopted over the coming decades.
Nvidia’s uncertain path to $200 per share
After a 10-for-1 stock split in June, Nvidia’s modest $115 stock price belies its true size. With a market cap of $2.84 trillion, the GPU chipmaker is already the third-largest company in the world — behind Microsoft and Apple, which are worth $3.23 trillion and $3.3 trillion, respectively.
A 73% rally to $200 should take Nvidia’s market cap to roughly $4.9 billion, most likely putting it in the No. 1 spot. And with a forward price-to-earnings (P/E) multiple of just 41, the stock certainly looks like it has more room to run, considering its triple-digit earnings growth.
That said, unlike the typical megacap company, which usually built its business over decades by servicing established, profitable sectors in the economy, Nvidia’s business remains speculative and uncertain — earning it a discounted valuation. The company looks unlikely to hit a share price of $200 in 2024 or any time soon until the software side of the AI industry starts to carry its own weight. And that is far from guaranteed.
Should you invest $1,000 in Nvidia right now?
Before you buy stock in Nvidia, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Nvidia wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $710,860!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of September 16, 2024
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Goldman Sachs Group, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Can Nvidia Stock Hit $200 in 2024? was originally published by The Motley Fool
Source: finance.yahoo.com