NVIDIA started making graphic cards for video games
Founded in 1993 as a fabless semiconductor company that designed graphic cards for video games, the company has skyrocketed to heights that the founders likely didn’t imagine when starting the company. Nvidia Corporation (NASDAQ: NVDA | NVDA Price Prediction) stock exploded higher in 2023 after posting earnings that blew away Wall Street projections in every reporting quarter. While the company remains the darling of tech investors with chips designed for Artificial Intelligence applications, we found six reasons to avoid the shares now.
NVIDIA stock is expensive
Trading at a whopping 64 times earnings, the shares have tripled in the last year, from a low of $138.84 to a stunning high of $505.48 after the giant third-quarter earnings print. Even if the stock hits the predicted earnings-per-share of 2024 for $20.47, it would still trade at a rich 25 times earnings. Some studies have shown that stocks trading over 25 times earnings will perform poorly over the next five years.
Bearish traders sold the massive 3rd quarter earnings results
Despite posting results for the third quarter that blasted Wall Street estimates, the stock sold off in a typical “buy the rumor, sell the news” move. The question is how much of the selling was profit-taking and how many brave short-sellers sensed a top in the stock.
NVIDIA stock has traded sideways since the summer
Despite the perception by many that the move higher has been of the parabolic variety, the shares have traded between $400 and $500 since back in July. Should the stock ever break the support in the low $400s, the chances are good it could easily fall back to the $300 level.
The graphics card competition will be coming after them.
The technology industry is always looking for ways to take down a sector leader, and you can bet that many are doing just that. Advanced Micro Devices (NASDAQ: AMD) has been battling Nvidia for graphic cards for years, and for years the Nvidia cards won. However, AMD’s Radeon RX 7000 series lineup has evened up the battle, and many feel that at the top end, the AMD cards are more cost-effective and have a much more user-friendly interface.
Artificial Intelligence challengers are also stalking NVIDIA.
Advanced Micro Devices and Intel Corporation (NASDAQ: INTC) are after Nvidia’s dominant 85% market share in the AI accelerator market. While both companies still have a long way to go to catch the company, they have bottomless pockets and will continue producing artificial intelligence chips. Intel’s purchasing of Habana Labs helped jumpstart the company’s AI chip efforts with the Gaudi 2 this year and the Gaudi 3 in 2024.
Wall Street is all in on NVIDIA for now.
As is always the case across Wall Street, sell-side analysts are decidedly bullish when a red-hot stock leads the pack. With 37 analysts covering the company, there is 1 Strong Buy rating, 33 Buy ratings, 2 Hold ratings, and just 1 Sell rating. This strong backing force could turn fast should there be any corporate missteps.
The China chip wild card remains in place
In August, the President signed an executive order prohibiting some U.S. investment in China in sensitive technologies like computer chips. The order authorizes the Treasury Secretary to ban or restrict U.S. investments in semiconductors, quantum information technologies, and some artificial intelligence systems. In addition, in October of this year, the U.S. Department of Commerce banned the sale of advanced artificial intelligence chips, and Nvidia’s H800 and A800 products are expected to be affected.
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