After soaring a whopping 194% over the last 12 months, Nvidia (NVDA +3.80%) stock has richly rewarded its near-term investors as it rides a wave of explosive demand for AI hardware. But so far, this industry has been more hype than substance, and Wall Street is beginning to notice. Let's dig deeper into what the next year could have in store for Nvidia as hype fades and fundamentals start to play a bigger role.
Analysts are starting to sound the alarm
In late 2022 and early 2023, financial media was awash with grandiose visions for the future of AI. PwC expected it to add $15.7 trillion to the global economy by 2030. And Bloomberg Intelligence projected the market to be worth $1.3 trillion by 2032 as the new technology was applied to digital ads, software development, and other services. But now, some on Wall Street are beginning to sing a different tune.
NASDAQ: NVDA
Key Data Points
In June, Goldman Sachs released a report suggesting that the roughly $1 trillion in capital expenditures (capex) expected to pour into AI hardware over the coming years may exceed the potential returns. And they have a point.
So far, most consumer-facing generative AI start-ups are generating significant losses. And over the longer term, free, open-source large language models (LLMs) could also commodify the technology, eroding the economic moats for early leaders. This would hurt Nvidia because if its software clients don't profit from their AI investments, eventually, they will stop spending. But so far, there is no evidence of a slowdown.
The cracks haven't appeared yet
The good news for Nvidia shareholders is that if the company faces impending doom, there are no signs of it yet. The chipmaker's rocket-ship rally is still backed by incredible operational performance.
Second-quarter revenue doubled year over year to $13.51 billion, driven by a 171% increase in the data-center segment where Nvidia sells its highest-end graphics processing units (GPUs), like the H100 and A100 used to train and run AI algorithms. For now, supply seems to be outstripping demand. And the company's gross margin increased from 64.6% to 70.1%, while its profits jumped 843% to $6.19 billion.
Image source: Getty Images.
That said, the AI boom is getting a little long in the tooth. Over the next 12 months, Nvidia will face difficult comps as it tries to maintain growth against already high prior-year numbers. This could eat away at the stock's valuation, which seems to be pricing in continued expansion. With a forward price-to-earnings (P/E) ratio of 49, Nvidia trades at a significant premium over the Nasdaq 100's forward estimate of around 30.
Is Nvidia stock a buy?
It can be tempting to bet on Nvidia because of its practically exponential stock-price growth and the recent 10-for-1 stock split which makes the $3.18 billion company look deceptively affordable. However, investors who buy now are very late to the party and run the risk of holding the bag if things go wrong.
Over the next 12 months and beyond, the AI industry may face a reckoning as hype begins to fade and consumer-facing applications struggle to show enough revenue and earnings potential to justify the industry's spending on chips and other hardware. These challenges could put Nvidia's valuation at risk. And investors may want to stay clear for now.
