Nvidia (NASDAQ:NVDA) stock has been on a nice bull run, going from $154 in early August to $183. But then again, there has been a thawing of the U.S.-China trade war. In the meantime, the overall markets have been marching upward, coming to within a few percentage points of an all-time high.
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It’s also encouraging for NVDA stock that the AI (Artificial Intelligence) revolution remains particularly strong. Bu it seems as if just about all tech companies have some type of AI strategy! And even more importantly, the mega tech operators like Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and Facebook (NASDAQ:FB) are investing billions in the category.
But even with this secular trend, there are still nagging issues with Nvidia stock. Let’s face it, as we’ve seen over the past few years, there have been several rallies that have quickly petered out. And I think that this could happen again.
So let’s take a look at three things to worry about Nvidia stock:
Nvidia Stock and Trade
OK… it seems like the concerns about the trade war have been overwrought. After all, hans’t NVDA been able to hold up fairly well?
This is true. The company has a top-notch management team and also has the benefit of global scale.
But even though the U.S. and China have been showing signs of cooperation, an agreement still looks dicey. As a result, there is likely to be continued uncertainty, which could dampen the demand for chips but also lead to disruption of supply chains.
There is also the wildcard about the proposed acquisition of Mellanox (NASDAQ:MLNX). For the most part, the deal looks spot-on as it will help bolster the critical data center market.
Yet the problem is that the transaction may ultimately be blocked. Why? The reason is that China may want to retaliate against actions the U.S. has taken against companies like Huawei. Keep in mind that the bid-ask spread is quite large on the pricing for the MLNX deal. And besides, China has already shown its willingness to fight back, as seen with the blocking of Qualcomm’s (NASDAQ:QCOM) attempted acquisition of NXP Semiconductors (NASDAQ:NXPI).
Until recently, NVDA did not have to really worry about competition. The company was the pioneer of GPUs (Graphics Processing Units) and quickly dominated the gaming market. NVDA also was smart to leverage this technology into other categories like the data center and AI.
But nowadays other chip companies have been catching up. Just look at Advanced Micro Devices (NASDAQ:AMD). Once a marginal player — and near bankruptcy — the company has pulled off an impressive turnaround. CEO Lisa Su has focused obsessively on pushing innovation, such as with the launch of the RX chips for gaming and Epic systems for the data center.
Interestingly enough, it is not even traditional chip companies that have put pressure on NVDA. Companies like GOOGL, MSFT and Amazon (NASDAQ:AMZN) have been developing their own.
Finally, there are more startups emerging that are gunning for the AI chip market, such as Graphcore and Cerebras Systems.
NVDA Stock Valuation
Nvidia stock is far from cheap. Consider that the trailing price-to-earnings ratio is about 41x.
Now it’s true that Nvidia stock should fetch a premium since the company is a dominant player in several strategic markets. But the multiple is still on the high-side when compared to the growth rate, which has been on the decline (at least on a year-over-year basis).
Wall Street is also a bit skeptical, with the average price target at $186. In other words, this implies only about 2% upside from current levels.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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