December 1, 2023
At 0, What Are the Risks for Nvidia Stock?

Nvidia Stock (NASDAQ: NVDA) This year it has performed very well, increasing almost 3 times since the beginning of January. Nvidia has a lot going for it. Technology companies and developers are rushing to deploy generative artificial intelligence in their applications after the success of OpenAI’s ChatGPIT chatbot and it is bringing a windfall of sorts for Nvidia, whose high-end graphics processing chips, such as The A100 and H100 remain. The go-to product for AI workloads. In the most recently reported quarter, Nvidia’s revenue nearly doubled year-over-year to $13.51 billion, exceeding guidance of $11 billion. Nvidia is also becoming incredibly profitable due to the AI ​​boom. Net income rose 5-fold to $6.7 billion from a year earlier, as gross margin expanded to 71.2% from 45.9% in the year-ago quarter. The momentum is expected to continue. For Q3, Nvidia has guided that revenue could grow 170% year-over-year. Nvidia is also in a relatively favorable position regarding supply. The company has made significant commitments to its suppliers to meet demand and has indicated that it expects to increase supplies each quarter over the next year.

NVDA stock’s Sharpe ratio since the beginning of 2017 was 1.1, which is higher than the S&P 500 index’s 0.6 over the same period. compare this to Sharp of 1.2 For Trefis Reinforced Value Portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

That being said, at the current market price of approximately $420 per share, there are potential risks that investors should be aware of. While Nvidia remains at the top position in the market for AI chips, traditional chip makers like Intel
And given the high stakes, AMD is making significant investments to gain hold in this area. AMD recently unveiled the MI300X chip that is specifically targeted at large language model training and inference for generative AI workloads. The chip’s specs, which include 192 gigabytes of high-bandwidth memory, which is a far cry from the 120GB found on Nvidia’s H100 data center GPUs, show it can compete favorably with Nvidia. Additionally, big tech players like Google
Doubling down on work on silicon related to AI and machine learning. For example, Google’s Tensor Processing Units are specialized integrated circuits focused on machine learning. Although Nvidia’s chips are superior in terms of overall performance at the moment, the company is also using proprietary software and programming languages ​​to better lock in customers, making competition unsustainable for Nvidia’s current growth and unusually high margins. Will give.

With AI being seen as a transformative technology, governments are looking at regulating the sector. The Biden administration has banned the export of advanced chips such as A100 and H100 GPUs to China. While Nvidia has made design changes, offering A800 and H800 AI chips that run within regulations in the Chinese market, it underlines the risks for the company because data center sales in China account for 20% of the company’s total sales. To 25%. Data Center Sales. The US government also recently expanded the ban on high-end AI chips to include some countries in the Middle East. Although Nvidia does not see any material impact from these sanctions, geopolitical risks may remain a factor for the company.

Nvidia’s valuation is also relatively high. The stock trades at around 40x FY’24 earnings and around 18x revenues. This compares to the broader semiconductor industry’s average price-to-sales multiple of about 4.5x. Tesla
The stock did not trade at P/S multiples of these levels at its peak in 2020-2021. Although growth is coming from the company, with consensus estimates projecting sales to nearly double this year, if growth falters for any reason, especially in the current high-interest rate environment, it could be a threat to investors. This may prove to be a risk. We remain neutral on Nvidia stock with a valuation of $408 per share, which is slightly below the current market price. See our analysis nvidia evaluation, Is NVDA stock expensive or cheap? For more information on what drives our value estimate for NVDA stock. Also, see our analysis nvidia revenue To take a closer look at the company’s key revenue streams.

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