Nvidia’s stock price surged over 200% in 2023 on the back of artificial intelligence hype. However, as the AI market enters the “trough of disillusionment” in 2024, analysts have varying views on Nvidia’s growth prospects amidst the cool down.
High Expectations Set Stage for AI Bubble Burst
Nvidia, the leading maker of graphics processing units (GPUs) for AI and gaming, became a Wall Street darling as demand for its chips skyrocketed. The stock’s massive run was partly fueled by the notion that AI would transform every industry.
However, as AI projects confront real-world complexities in 2024, overly optimistic expectations are coming back down to earth. This has raised uncertainty around growth stocks like Nvidia that saw huge gains during the AI frenzy.
According to Bank of America analyst Vivek Arya:
“Nvidia remains our top sector pick in semis with potential for $100B+ FCF generation over the next two years from its still ramping data center business.”
But Arya also warns:
“Beware the ‘trough of disillusionment’ and lumpiness for AI/data center spending near-term.”
This view suggests Nvidia will continue growing through the AI cool-off, but should expect some bumps along the way.
Growth Trends Intact Despite Immediate Headwinds
Nvidia stumbled last year when a crypto mining boom went bust. The latest AI hype cycle also shows signs of peaking. Still, analysts see strong tailwinds for Nvidia’s data center and automotive businesses.
As Arya notes:
“Nvidia enjoys a >95% share in training/inference AI chips and also has a strong roadmap for next-gen H100/Hopper chips and Grace CPUs.”
Anbarasu Anantharamanan, Sr. research analyst at Green Street, echoes this sentiment:
“We are bullish on NVDA’s prospects in AI/HPC and Automotive sectors – which will likely remain strong multiyear growth vectors.”
Nvidia also has new growth frontiers to tap into, like enterprise AI, smart cities, self-driving cars, and the metaverse. The expansion of AI beyond big tech into traditional industries is still in early innings.
Timothy Arcuri, analyst at UBS, believes investors should stay long NVDA through temporary slowdowns:
“The AI trend will have a very long tail. When you get these pauses … you have to ride through them.”
Valuation Concerns Creep In
At 35x forward earnings, Nvidia trades at a significant premium to chip peers. This lofty multiple leaves little room for error, fuelling warnings around over-valuation.
According to five-star analyst Joseph Moore of Morgan Stanley:
“We continue to believe NVDA is the best positioned growth stock in semis but increasingly challenging comps leave risk skewed to the downside despite strong secular tailwinds.”
Moore downgraded the stock from Overweight to Equal-weight in December with a $725 price target. This only represents 7% upside from current levels versus 75% upside before the downgrade.
Some analysts believe competitors will encroach on Nvidia’s lead in AI chips. Annual AI chip revenue growth already shows early signs of deceleration, as the chart shows:
|AI Chip Revenue Growth
If growth rates continue trending downwards, justifying Nvidia’s premium multiple will get harder.
But even analysts cautious on valuation view AI and data center momentum continuing. Joseph Moore notes:
“Data Center/AI momentum persists even in a weakening macro.”
So the debate seems centered on whether Nvidia deserves its towering valuation, not its long-term growth outlook.
What’s Next for Nvidia
Nvidia faces tricky near-term comps with last year’s crypto hangover. But strong data center and gaming demand should drive double-digit top line growth.
With AI adoption spreading across industries, Nvidia’s TAM expansion should support above-market growth for years. Automotive also offers a key vertical for diversification and high-margin recurring software revenue.
As such, most analysts recommend buying on dips rather than selling out. While AI disillusionment may pressure Nvidia’s premium valuation, secular growth drivers look here to stay.
The question is not if Nvidia will grow, but at what pace – and how much investors are willing to pay for it. With potential for $100 billion in free cash flow generation over the next two years, Nvidia still offers a compelling risk/reward profile for long-term investors.
As Oppenheimer analyst Rick Schafer sums it up:
“Nvidia’s valuation likely remains elevated, even with a potential near-term pause, but strong secular growth should sustain premium multiples.”
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