Nvidia (NASDAQ:NVDA), a leading global chipmaker, has emerged as a big winner in AI technology, and the company is striving for dominance in this space with the launch of a new chip. Nvidia stock has risen over 240% this year, and its valuation has ballooned, with investors betting on the company to emerge as and remain the semiconductor company of choice among tech companies. Despite the company’s long-term growth potential, I am forced to be neutral on Nvidia stock because of its premium valuation.
The Popularity of Nvidia’s H100 Chip
Nvidia is not new to developing high-quality chips. The company’s Xavier chipset has risen through the ranks to emerge as a leading enabler of autonomous driving, while Volta has gained popularity as one of the best-in-class chipsets for data centers. With the rise of generative AI since the launch of ChatGPT in November 2022, Nvidia’s H100 chipset has become one of the world’s most expensive and sought-after chips.
From large-scale companies, including Microsoft Corporation (NASDAQ:MSFT) and Tesla (NYSE:TSLA), to governments such as the United Arab Emirates, businesses and governments are rushing to buy as many H100 chips as possible to power their AI ambitions.
A classic example of the strong demand for these chips is how Tesla CEO Elon Musk, during a conference call with analysts in June, claimed that Nvidia has not been able to deliver sufficient GPUs to power Tesla’s autonomous driving efforts because of the massive demand seen by the chipmaker.
To understand the reasons behind the surging demand for H100 chips, an investor has to understand the technological complexities surrounding the development of AI-based applications.
In a nutshell, to develop AI applications, developers need access to unprecedented levels of computing power and memory bandwidth. General-purpose semiconductor chips that were previously in use fail to provide the required level of computing power and memory capacity to develop AI applications. This is where customized AI chips come in handy. Nvidia’s H100 chip has quickly emerged as a market leader because of the unparalleled computation power this chip processes.
The New H200 Chip Launch
Building on the success of the H100 chipset, Nvidia announced the launch of the H200 chipset on November 13. According to data published by the company, this new chipset will have 1.4 times more memory bandwidth and 1.8 times more memory capacity compared to H100 chips. Nvidia is planning to release the first batch of H200 chips to the market in the second quarter of next year.
This new chip launch should help Nvidia retain its leadership position in the chip market for AI technology. Because AI applications are expected to grow exponentially in the next decade, Nvidia’s strong market position in this space is likely to help the company’s revenue and earnings growth in the foreseeable future.
Securing Business in China with New Products
The U.S. Department of Commerce has made several announcements in the last few months restricting American chipmakers from selling semiconductors and related equipment to companies based in China. When these export restrictions first surfaced, analysts noted that Nvidia’s leading position in China’s booming AI semiconductor market would not be sustainable.
Also, reports noted on November 9 that Nvidia developed three new chips to be sold in China that meet U.S. export controls. According to The Guardian, these chips will be officially announced in the coming days. The news outlet also claims that Nvidia controls more than 90% of the $7 billion AI chip market in China, and these new chips will help the company sustain its growth momentum in the country.
According to company filings, Data Center revenue in China accounts for approximately 20% of the company’s total revenue, which suggests China is an important end market for the company. A hit to the business in China will materially impact the company’s short-term financial performance. In the long run, however, China could prove to be a less significant market as the company diversifies its revenue sources. Until this happens, investors will have to keep a close eye on Nvidia’s prospects in China.
Is Nvidia Stock a Buy, According to Analysts?
In recent weeks, Nvidia has attracted positive notes from several Wall Street analysts. On November 13, a group of Barclays analysts led by Blayne Curtis boosted its outlook for Data Center revenue to $18 billion for the fourth quarter of Fiscal 2024, well ahead of the $14 billion consensus estimate. Barclays also expects the supply chain to become more stable in the coming months, enabling Nvidia to meet the surging demand for its AI chips.
On November 14, Oppenheimer analysts claimed that the tech sector is well-positioned for a bull run and listed Nvidia as one of their top picks in the large-cap space.
On November 15, Citi analyst Atif Malik reiterated his Buy rating on the company and maintained his price target of $575 ahead of the company’s earnings announcement scheduled for November 21.
Based on the ratings of 38 Wall Street analysts, NVDA comes in as a Strong Buy, and the average Nvidia stock price target is $647.32, implying 32.4% upside potential.
Conclusion: Nvidia’s Growth Should Continue, but Shares are Richly Overvalued
Despite facing supply-chain challenges and regulatory pressures in China, Nvidia is well-positioned to grow as its AI chips continue to dominate the market. With the upcoming launch of the H200 chipset and three new products aimed at the Chinese market, Nvidia seeks to retain this market leadership in the long run.
However, at a forward GAAP P/E of 52, Nvidia is not cheaply valued in the market, and there’s reason to believe that much of the expected growth is already priced in. Investors may have to wait for a better opportunity to invest in the company.
