The blue-chip chipmaker and semiconductor giant Nvidia (NASDAQ: NVDA) has been one of the most exciting stocks throughout the year. However, New Street Research recently issued a rare downgrade for Nvidia, moving its rating from “buy” to “neutral.”
Pierre Ferragu, an analyst at New Street Research, cited valuation concerns as the primary reason for the downgrade. Nvidia’s stock has seen an extraordinary rise, gaining 154% this year on top of a nearly 240% increase in 2023.
Despite the robust performance and the company’s strong fundamentals, Ferragu believes the stock is “getting fully valued.” Further price increases will depend heavily on a significantly improved outlook beyond 2025, a scenario on which Ferragu does not yet have strong conviction, according to Bloomberg
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This cautious stance is vital for traders and investors considering the potential for a market correction or stagnation if Nvidia’s growth does not meet these high expectations.
Key valuation metrics
Analyzing Nvidia’s valuation metrics provides a clearer picture of the downgrade’s rationale. Nvidia’s trailing PE ratio is 73.63, while the forward PE ratio is 46.44. These figures are substantially higher than the industry average, indicating that investors are currently paying a high price for Nvidia’s earnings.
The price-to-sales ratio is at 25.58, reflecting a premium valuation compared to its peers. With a PEG ratio of 1.50, Nvidia’s stock price relative to its earnings growth is on the higher side, suggesting overvaluation if growth expectations are not met.
Over the past 12 months, Nvidia reported revenues of $79.77 billion and earned $42.60 billion in profits, translating to earnings per share (EPS) of $1.71. Key income statement figures include a gross profit of $60.08 billion, operating income of $47.74 billion, net income of $42.60 billion, and EBITDA of $50.68 billion.
These robust figures underscore Nvidia’s strong financial health and highlight the expectations built into its current stock price.
Regulatory and market challenges
Nvidia is currently under scrutiny by French antitrust regulators for alleged anti-competitive practices. In September 2023, Nvidia was one of the companies targeted in dawn raids by French authorities investigating the graphics cards sector.
This regulatory pressure adds a layer of uncertainty for investors. Moreover, there’s been a notable shift as some investors begin rotating out of Nvidia, seeking to capitalize on gains or mitigate potential risks associated with high valuations and regulatory issues.
This shift has contributed to recent price volatility, with Nvidia shares consolidating and declining from a high of $135.58 to around $124.30.
ChatGPT-4.0 sets Nvidia’s price target
Based on a comprehensive analysis of Nvidia’s current valuation metrics, financial performance, regulatory challenges, and market sentiment, ChatGPT-4o sets a one-year price target for Nvidia at $135.
This target is justified by several factors. Nvidia’s high PE and PS ratios indicate that the stock is currently priced at a premium. While this reflects investor confidence in Nvidia’s future growth, it also suggests limited room for further price appreciation without substantial earnings growth.
By considering these factors, the $135 price target reflects a balanced view of Nvidia’s potential risks and rewards.
While Nvidia remains a leader in the artificial intelligence (AI) chip market with solid financials and strong growth forecasts, its high valuation and regulatory challenges present potential risks.
Investors should closely monitor Nvidia’s earnings reports, regulatory developments, and broader market trends to make informed decisions. Balancing the potential for high rewards with the risks of high valuation and regulatory scrutiny will be crucial in navigating Nvidia’s investment landscape.
Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.
