There’s no doubt Nvidia’s (NASDAQ:NVDA) 2023 was an all-out success. The shares delivered almighty returns and those were based on the company becoming the go-to name for AI data center chips. The problem for Nvidia, if you can call it that, is how to sustain that success in 2024 and beyond.
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Well, essentially, says D.A. Davidson analyst Gil Luria, you can’t.
“We see NVDA as an important leader in accelerated computing and expect impressive 20% CAGR off of 2022 levels across cycles as it maintains its lead in a range of categories,” the 5-star analyst noted. “However, we believe out-year consensus expectations are unlikely to materialize and will start reverting to trend line within the next 2-6 quarters. NVDA may be vulnerable as AI hype approaches the ‘trough of disillusionment.”
Luria sees three main issues with the Nvidia bull thesis. One stipulates that this not just a regular cycle and that data center spend will “continue to grow to 3-5x its pre-GenAI levels.” But that’s just not feasible. For instance, amounting to as much as 17% of Nvidia’s total revenue in the most recent quarters, as Microsoft has established a lead in providing GenAI services, it has become the company’s biggest data center customer. That has brought its Capex to 17% of revenue from a 5-year trend line of 12%. “We believe MSFT has pulled in data center spend and is unlikely to continue at this level indefinitely,” Luria opined on this matter.
The second point is that Nvidia will hold on to its 80-90% share of the data center market. However, the tech giants (Apple, Amazon, Microsoft, Alphabet) are not just developing solutions tailored for their own data centers and specifically designed for GenAI, they are also actively supporting alternatives to Nvidia such as AMD. “The longer the investment cycle lasts, the more they will invest in their own chips, making the inevitable cycle correction that much more pronounced,” Luria notes.
Lastly, one bull case is that the tech’s development will continuously boost demand for GPUs. While Luria notes that it might seem counterintuitive, the trajectory of the tech is moving in the opposite direction. Smaller GenAI models are demonstrating growing effectiveness, particularly as larger general models approach the “efficient frontier.” Additionally, Luria thinks enterprise customers have minimal interest in general models, instead showing a preference for training models using their more specific and proprietary datasets, which tend to be narrower in scope.
So, although Luria still thinks generative AI is “the most important transformative technology since the Internet,” he does not anticipate the same amount of investment as last year to continue beyond 2024.
As such, Luria initiated coverage of NVDA shares with a Neutral raring and $410 price target, suggesting the stock will shed 14% of value throughout the next year. (To watch Luria’s track record, click here)
Luria, however, is amongst a minority on Wall Street. 3 others join him on the fence, but they are outnumbered by 30 positive reviews, providing the stock with a Strong Buy consensus rating. The forecast calls for one-year returns of 36%, considering the average target clocks in at $654.1. (See Nvidia stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
