About this time last year, Nvidia (NASDAQ:NVDA) stock was in a tailspin. By late December, the shares were at $127. The company was facing downward pressure across its main businesses, such as gaming and the datacenter. The cryptocurrency segment was also rapidly evaporating.
But CEO Jensen Huang took swift action. NVDA stock is now at $212, with the market cap at $134 billion. In fact, there has been an 47% gain since the middle of August.
Wall Street analysts are definitely showing their enthusiasm. Recently Morgan Stanley analyst Joseph Moore upgraded his outlook on Nvidia stock, increasing the price target from $217 to $259. He believes that the gaming and data center businesses are back on track. There will also be a boost from AI (Artificial Intelligence category).
According to Moore: “The company remains nearly unchallenged in its key [machine learning] training market, maintains high market share in emerging areas such as inference, and is leading the way in new growth opportunities such as traditional machine learning analytics.”
Then there was a report from SunTrust analyst William Stein. He reaffirmed his price target of $240 on Nvidia stock, writing: “We expect NVDA to outperform owing to superior positioning in gaming, server acceleration / AI, & (eventually) autonomous driving.”
For the most part, Nvidia’s core GPU (Graphics Processing Unit) technology continues to make great strides. And it has proven to be quite versatile, becoming a standard for the AI industry because of the ability to process huge amounts of data in parallel.
The Nagging Issues
Yet the fact is that Nvidia is facing more intense competition. Advanced Micro Devices (NASDAQ:AMD) has continued its winning ways, as the company has aggressively pushed innovation. In terms of the data center, the EPYC server processor has seen rapid growth. Some of the marque customers include Amazon (NASDAQ:AMZN), IBM (NYSE:IBM), Microsoft (NASDAQ:MSFT), Twitter (NYSE:TWTR) and Tencent. They all understand that AMD’s technology is standout. But these customers are also looking for an alternative.
In the meantime, Intel (NASDAQ:INTC) has been getting back on track. For example, the company will launch its GPU — the code name is Ponte Vecchio — that allows for sophisticated HPC modelling and AI training. The chip will be based on Intel’s 7-nanometer design.
But competition is not the only problem facing Nvidia. There is still the overhang of the U.S.-China relationship. True, the situation has thawed recently. But as seen during the past couple years, this may not last long. There is also the potential for new tariffs in the next couple weeks.
Oh, and Nvidia’s $7 billion pending acquisition for Mellanox Technologies (NASDAQ:MLNX) could be blocked by Chinese authorities. If so, this would be a major blow to the company. Keep in mind that there are strong synergies between NVDA and MLNX as well as nice opportunities for growth.
Bottom Line On Nvidia Stock
Even though the core business for Nvidia has improved, the results have still been choppy. Just look at the latest quarterly results. The revenues dropped 5% on a year-over-year basis and net income fell by 27% to $899 million.
Yet the valuation for Nvidia stock is expecting that everything is likely to go right. Note that its price-to-earnings ratio is at a hefty 56X.
In other words, if there is some softness in the results, which management indicated could be the case for the current quarter, then the shares could be vulnerable. So for now, it’s probably best to hold off on NVDA stock.
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.