Nvidia (NVDA) has been on an incredible run out of the depths of March 2020, now up over 400%. Indeed, the $637 billion GPU designer has benefited from unprecedented demand across a wide range of categories, from gaming to cryptocurrency mining.
Despite the incredible strength across the board, the ever-steepening valuation makes it tough to get behind the stock. After soaring about 22% in a month, it’s tempting to chase the momentum stock with a “buy high, sell higher” strategy.
Although Nvidia’s brilliant CEO, Jensen Huang, has more than proven that he and his firm are more than worth paying up for, there are potential long-term risks that should not be discounted due to recent strength.
It’s tough to find hair on Nvidia’s nearly perfect growth story. Still, for a stock trading at around 29 times sales, one must put in the extra due diligence to reduce the risk of overpaying for it. Nvidia justifies a premium multiple, but just how premium of a multiple should depend on the firm’s dominance in the GPU space.
For now, Nvidia is a dominant leader with a growing moat. However, there are potential disruptions within the fast-moving graphics processing market that could prove challenging to the GPU behemoth.
For that reason, I am reluctantly bearish on shares of NVDA, primarily due to valuation concerns. Although, I am inclined to change my stance on a pullback. (See Analysts’ Top Stocks on TipRanks)
Can Apple Pose a Challenge to Nvidia?
With Apple (AAPL) recently pulling the curtain on its game-changing M1 Pro and Max line of SoCs (System on a Chip), which demonstrated incredible graphical performance at low power, Nvidia should be keeping watch.
Most remarkably, the top-of-the-line M1 Max chip with the 32-core GPU gave Nvidia’s RTX 3080 GPU a good run for its money in benchmarks. While the RTX 3080 video card still held its own incredibly well in terms of performance, one can’t help but notice the difference in power consumption.
Apple’s M1 Max chip isn’t at all power-hungry as most other top-of-the-line GPUs, allowing its specced-out Macbook Pros to operate at a high level of graphical performance while unplugged from a power supply.
Indeed, high graphical performance at low power was the central selling point for the M1 Pro and Max chips. While the line of Apple chips could grow to become a thorn in the side of Nvidia going forward, it’s worth noting that Apple’s chips, while impressive, are still not ready for primetime with gamers.
Still, given the M1 Max’s massive jump in performance versus the base M1 chip, the pace of innovation shouldn’t go unnoticed. Sure, Apple challenging Nvidia’s dominance in GPUs seems far-fetched today, but if the M-series line of chips can continue at this rate, anything could be possible in three years from now.
For now, the question isn’t whether Apple can continue outpacing rivals in CPUs or GPUs. Rather, it’s whether the Mac can beckon gamers. The Mac has never been known for gaming, and top-of-the-line hardware may not be enough to incentivize developers to create Mac versions of the latest titles.
Nvidia Has the Edge over Apple in GPUs, for Now
At the end of the day, developers will launch on platforms with a considerable amount of gamers, and gamers will gravitate towards platforms (like PC or consoles) that have a wide selection of titles. Gamers prefer PC over Mac due to a lack of titles, and developers prefer PC over Mac due to a lack of gamers. Incredible graphical hardware isn’t good enough if it can’t be put to use.
After having dropped support for various titles on Mac, Apple will need to take action if it’s to be a serious contender in GPUs. Perhaps Apple could transform Apple Arcade from a casual, mobile-focused platform, to one that includes big-budget Mac-focused titles.
If Apple were to acquire a major game developer and make exclusive titles for the Mac, it could beckon gamers. Until then, Apple may not be as severe a threat to Nvidia through the eyes of investors.
Wall Street’s Take
Turning to Wall Street, Nvidia has a Strong Buy consensus rating, based on 22 Buys and one Hold assigned in the past three months. The average Nvidia price target of $241.85 implies 5.4% downside potential.
Analyst price targets range from a low of $185.00 per share to a high of $300.00 per share.
The Bottom Line
Creative professionals can appreciate the new Macbook Pro for the powerhouse that it is. However, until the Mac can reach a broader audience that includes gamers, Nvidia’s dominance and economic moat still seem sound.
That said, underestimating Apple is never a good idea, and associated risks should be considered over the long run. Who knows? Maybe Apple’s M3 or M4 line of chips will be widely embraced by game developers in a few years. If that happens, Nvidia could have a problem on its hands and at these valuations, the stakes appear quite high.
Disclosure: Joey Frenette owned shares of Apple at the time of publication.
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