Over the last two years, the hype around the artificial intelligence (AI) boom has led to incredible operating momentum for Nvidia (NVDA 0.30%), the company that designs and manufactures most of the industry's chips. But while business is roaring, the company's stock price seems to have hit a roadblock. Let's discuss why this might be happening and determine whether Nvidia's shares can hit $200 before the end of the year.
Nvidia's rocket-ship rally fades
With shares up by around 2,450% over the last five years, Nvidia has been a rewarding investment for its long-to-medium-term shareholders. However, the thesis is beginning to unravel, as strong operational results are no longer impressing the market as much as before.
NASDAQ: NVDA
Key Data Points
Second-quarter revenue soared 122% year over year to $30 billion, driven by massive demand for Nvidia's data center graphics processing units (GPUs), which help run and train AI algorithms. The company's bottom line also remains buoyant, with operating income jumping 174% year over year to $18.6 million. Management expects the release of new AI hardware products based on the faster and more efficient Blackwell architecture to stimulate client demand in 2025 and beyond.
Nvidia's board also approved a whopping $50 billion worth of share repurchases in the quarter, which can boost investors' claim on future earnings by lowering the number of shares outstanding.
However, while these are objectively good results, Nvidia's split-adjusted stock price has fallen around 10% since the release on Aug. 28, suggesting many market participants think the operational momentum is unsustainable.
Storm clouds gather over the AI industry
There are several reasons why investors might take Nvidia's current results with a grain of salt. For starters, the consumer-facing software side of the generative AI industry is yet to prove its monetization potential. For instance, analysts at Goldman Sachs worry that today's AI systems simply aren't designed to solve problems complex enough to justify their costs.
And while the technology behind large language models (LLMs) like ChatGPT continues to improve, that doesn't necessarily mean they will become easier to monetize because of competition from free, open-source rivals like Meta Platforms' Llama or Elon Musk's Grok.
Image source: Getty Images.
There is a growing risk that AI could follow the pattern of previous hype cycles like the internet or electric vehicles, where corporations overbuilt capacity in anticipation of consumer demand that didn't materialize quickly. If this happens with generative AI, the market for Nvidia's pricey data center hardware could plateau or decline in the near term -- even if the technology becomes widely adopted over the coming decades.
Nvidia's uncertain path to $200 per share
After a 10-for-1 stock split in June, Nvidia's modest $115 stock price belies its true size. With a market cap of $2.84 trillion, the GPU chipmaker is already the third-largest company in the world -- behind Microsoft and Apple, which are worth $3.23 trillion and $3.3 trillion, respectively.
A 73% rally to $200 should take Nvidia's market cap to roughly $4.9 billion, most likely putting it in the No. 1 spot. And with a forward price-to-earnings (P/E) multiple of just 41, the stock certainly looks like it has more room to run, considering its triple-digit earnings growth.
That said, unlike the typical megacap company, which usually built its business over decades by servicing established, profitable sectors in the economy, Nvidia's business remains speculative and uncertain -- earning it a discounted valuation. The company looks unlikely to hit a share price of $200 in 2024 or any time soon until the software side of the AI industry starts to carry its own weight. And that is far from guaranteed.
