It's an understatement to say that Wall Street analysts are bullish on Nvidia(NASDAQ: NVDA).
FactSet tracks 64 analyst ratings on the chip designer's stock. And 51 of them rate Nvidia a buy in that system -- the highest available grade, equivalent to a strong buy on most rating platforms. Nine more call Nvidia an overweight opportunity, and the last four have settled for a hold. None of the 64 financial firms are going below that level.
The consensus price target stands at $149 per share, 29% above Nvidia's current share price. Long story short, analysts absolutely love the stock, and they highly recommend buying into it in the current market.
I'm not so sure, though. Let me tell you why.
Why I'm holding Nvidia shares but not buying more
Don't get me wrong: I own a couple of Nvidia shares and have no intention of selling them any time soon. As long as the artificial intelligence (AI) boom has legs, Nvidia will be a front-runner for every contract regarding high-performance AI accelerator chips.
This is the hardware designer behind most of today's leading large language models (LLMs), including OpenAI's groundbreaking ChatGPT system. These bona fides are more than enough to keep Nvidia relevant for years to come.
But I am not interested in buying more Nvidia shares today, and it's probably a better idea to trim your holdings if you saw big gains on them over the last two years.
In fact, I took that step in February, locking down a 320% gain on about half of my Nvidia positions over a span of 20 months. It wasn't a perfectly timed sell, but market timing never works anyway.
Nvidia's stock has gained 77% since then, and I don't mind missing out. I'm just happy to have reinvested some of my Nvidia winnings in more promising growth stocks, shielding the majority of that winning investment from potential price drops.
And I wouldn't be surprised to see some steep Nvidia price cuts from this lofty valuation.
The risks Wall Street might be ignoring
Again, Wall Street's finest professionals either disagree with me or are willing to take the risk. That fact doesn't change my Nvidia analysis. Stock market analysts are not always right, despite their years of experience and access to expensive analytical tools.
In this case, lots of investors are shrugging off the company's competition. At the same time, the stock continues to trade at incredibly rich valuation ratios. That's a bad combination -- Nvidia's market makers are ignoring serious risks that really should keep a lid on the stock's valuation.
What kind of competition is the company facing? I can't cover every base, but here's a quick overview of a few interesting challengers and how they stand apart from Nvidia's products:
Advanced Micro Devices(NASDAQ: AMD) has its Instinct series of AI accelerators, currently led by the MI300 chip. These processors offer number-crunching performance comparable to Nvidia's finest, but with a higher memory capacity and lower price per unit. Many cheap processors can outperform a smaller batch of better but more expensive ones.
The Intel(NASDAQ: INTC) Gaudi 3 AI accelerator comes with higher performance per watt and more modest requirements for cooling. Power efficiency is a big deal, so this advantage could be the final straw that seals the chip order.
The recently announced IBM(NYSE: IBM) Spyre AI accelerator was designed to add AI features to Big Blue's mainframe servers. Expected to launch in 2025, this product will upgrade traditional mainframe workloads with high-performance AI features.
Mobile chip leader Qualcomm(NASDAQ: QCOM) is building AI accelerators into its latest and greatest smartphone and tablet processors. This company attacks the AI opportunity from a very different angle than Nvidia's back-end focus, arguably making it more of a partner than a rival. Still, Qualcomm's mobile chips will probably steal workloads away from Nvidia's more centralized and cloud-based computing clients, thus winning design dollars that otherwise could have landed in Nvidia's coffers.
Moreover, many of these AI-accelerator rivals also compete with Nvidia for manufacturing capacity. AMD, IBM, and Qualcomm all rely on the same third-party chip foundries to turn their designs into physical chips, often butting heads with Nvidia's chipmaking capacity requests. Intel prefers its own chip manufacturing facilities, which could give old Chipzilla a practical advantage if AI chip orders ever overwhelm the usual manufacturing specialists.
Why Nvidia might face a price correction
It's easy to imagine a world where one or more of these household-name alternatives carve out lucrative niches in the AI accelerator market, undermining Nvidia's early lead along the way. Furthermore, many market watchers have started asking questions about how valuable the generative AI services are to the consumers and corporate clients found at the other end of Nvidia's revenue funnel. What if this booming AI market turns out to be a poppable bubble?
These risks might not amount to much, but then Nvidia seems poised for a price correction on the slightest of competitor wins or total market slowdowns. The stock trades at 30 times sales and 62 times free cash flow -- valuation ratios normally reserved for fast-growing software companies.
I'm not saying that the stock is doomed to crash someday soon. At the same time, I'm not convinced that it can avoid a dramatic price correction much longer. So I'll hold a couple of shares after pocketing a generous two-year return on more than half of the original investment. With a modest amount of skin in the game, I'm happy to watch Nvidia from the trading sidelines as the generative AI business evolves.
And that's why I'm not an Nvidia bull right now, unlike the vast majority of Wall Street's analysts.
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Anders Bylund has positions in Intel, International Business Machines, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Qualcomm. The Motley Fool recommends Intel and International Business Machines and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
