Nvidia (NASDAQ:NVDA) stock has been seemingly unstoppable in 2023, with an impressive 218% gain year-to-date. It’s been a generational rally and one that remains difficult to view from the sidelines as the so-called “AI chip rip” continues into the holiday season. As Nvidia does its best to stay on the “maxed out” expectations treadmill, it will certainly be interesting to see how the AI kingpin fares in 2024.
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After more than tripling in less than a year, I’d not be a chaser of Nvidia stock, as even a continuation of the broader rally in AI stocks may do little good for Nvidia, given how far it’s climbed and how frothy its valuation multiples have become. As a result, I’m inclined to take a more neutral stance, even though Nvidia still looks like a king among men.
AI Enthusiasm Could Carry Into 2024, but Nvidia May Not Benefit
On Thursday, the Nasdaq 100 (NDX) rocketed higher. The rally was due to renewed AI enthusiasm following Alphabet’s (NASDAQ:GOOGL) official entry into the large language model (LLM) arena with the much-awaited Gemini product. With the wind at the back of firms with skin in the AI game again, it seems like a good time to check in with Nvidia again after its recent November correction. Although the next leg of the AI run could have the potential to be considerable, I’m still not sure whether Nvidia will be able to add to its rally. After all, the stock may have booked many years’ worth of gains in 2023, and it may be time for others to feel the AI tailwinds at their backs.
At writing, Nvidia stock goes for 61.3 times trailing price-to-earnings (P/E), which is well ahead of the semiconductor industry average of 34.1 times and certainly ahead of its peers in the so-called Magnificent Seven, many of whom likely have more room to run on the back of AI in 2024.
In 2024, I’d look for Alphabet, which has its own line of AI chips — Tensor Processing Units (TPUs) — to join the AI leadership group alongside the likes of Nvidia going into the new year. Though Alphabet TPUs may not have the same firepower as the latest and greatest Nvidia-powered AI chip today, I view the firm’s eagerness to build custom AI chips as posing a potential threat to Nvidia at some point down the road.
For now, Nvidia seems to be sprinting to the endzone, with few combatants in sight that can make the tackle. That said, it’s unclear how long Nvidia can remain dominant as some of the market’s less-appreciated AI heavyweights like Alphabet and even Amazon (NASDAQ:AMZN) really look to flex their muscles in 2024. Further, there seems to be no endzone in sight for the top AI players.
The Rise of Custom AI Chips May Harm Nvidia
Moving forward, the trend of big-tech firms building their own custom chips will likely continue as they seek to get a piece of the economic profits from Nvidia. Whether we’re talking about CPUs (central processing units) or AI chips, many firms have recognized the value of building one’s own silicon, largely thanks to iPhone maker and custom chip pioneer Apple (NASDAQ:AAPL), which has seen its custom chip efforts pay massive dividends in recent years. On a side note, Apple has also been innovating on the front of AI hardware with its Neural Engine AI accelerator.
Every time a big-tech firm like Apple, Amazon, or Alphabet flexes an AI hardware offering to go up against Nvidia’s best chip, look for significant action in Nvidia stock as investors ponder whether new competing products stand to erode the company’s dominance.
The more firms that choose to build their own, the less demand there may be for future Nvidia AI chips if custom chips can keep up (or surpass) the performance of Nvidia’s offerings. That’s a massive if, though. So, the stakes remain high, and with such a lofty valuation, there exist bull- and bear-case scenarios for Nvidia as we advance further into the AI age.
Is Nvidia Stock a Buy, According to Analysts?
On TipRanks, NVDA stock comes in as a Strong Buy. Out of 34 analyst ratings, there are 31 Buys and three Hold recommendations. The average Nvidia stock price target is $661.00, implying upside potential of 41.9%. Analyst price targets range from a low of $560.00 per share to a high of $1,100.00 per share.
The Bottom Line
I predict that Nvidia stock will have a tougher time doubling up again and could trail the rest of the AI plays in the Magnificent Seven in 2024. The stock is expensive right now and could feel the heat as more players look to break into the AI chip market.
With Dr. Michael Burry — the underestimated genius who bet against the housing market in the face of the Great Financial Crisis — betting against semiconductor stocks with a big short position on the Nvidia-heavy iShares Semiconductor ETF (NASDAQ:SOXX), I think it’d be wise to temper one’s enthusiasm for red-hot AI stocks like Nvidia, at least until a pullback brings forth more reasonable valuations.
