Although Nvidia (NASDAQ:NVDA) is likely to be significantly hurt by the probable collapse of the crypto market, the company’s upcoming positive catalysts should more than outweigh the crypto implosion. Therefore, I expect NVDA stock to outperform the market over the next year.
Still, there are reasons to be cautious when it comes to Nvidia. A high exposure to crypto and relatively high valuation for NVDA stock leads me to believe competitors could outperform from here. Accordingly, here are three other chip names I think investors should consider instead.
Nvidia’s Powerful, Positive Catalysts
As I noted in a recent article, “HSBC analyst Frank Lee upgraded NVDA stock to ‘buy’ from ‘reduce'” and hiked his price target on the shares to $355 from $175. According to the bank, Nvidia’s chips that power artificial intelligence are fetching prices “between 10 and 20 times higher than the average gaming” graphics processing unit. Those extremely high prices, driven by the very rapid proliferation of AI, are going to boost Nvidia’s financial results and NVDA stock tremendously.
Moreover, the demand for chips that enable AI is expected to increase going forward. According to one study, the spending on such chips is expected to soar to $36.8 billion in 2025 from $16.86 billion last year.
Meanwhile, as I pointed out in a previous column, “electrification and the proliferation of advanced driver-assistance systems” is causing chip demand from automakers to jump. So, it’s not surprising to see Nvidia’s Automotive and Embedded unit revenue soar 135% year-over-year in Q4 of 2022. Further, Nvidia is doubling down on its auto business correctly, by partnering with Chinese manufacturing powerhouse Foxconn. This partnership is aimed at developing “automated and autonomous vehicle platforms.”
Finally, Citi believes that the demand for chips from data centers and smartphone makers will “stabilize” in the second half of this year. Of course, that development will be very positive for Nvidia and NVDA stock.
The Crypto Threat
In line with my previous predictions, Washington seems determined to shut down crypto trading. The Securities and Exchange Commission has taken legal action against many crypto exchanges. On Apr. 17, the SEC “charged crypto asset trading platform Bittrex, Inc. and its co-founder and former CEO William Shihara for operating an unregistered national securities exchange, broker, and clearing agency.” Last month, it issued a Wells notice to Coinbase (NASDAQ:COIN). And the Fed has strongly discouraged banks from getting involved with crypto.
In my view, it appears that Washington is looking to make it very difficult, if not impossible, for anyone to trade crypto. Of course, such a situation will cause the value of cryptos to crash. Additionally, this could negatively impact the demand for Nvidia’s chips, which are used to mine crypto.
Nvidia refuses to estimate the amount of revenue it obtains from crypto miners. However, last November, Nvidia’s CFO stated that the demand for “some” of its chips was affected by only a change in how Ethereum (ETH-USD) is mined. As a result, it seems clear that a near-cessation of crypto mining would have a meaningful, adverse effect on NVDA stock.
Valuation and Better Bets
Clearly, NVDA stock comes with a rather steep valuation. Currently, the company’s shares are changing hands at a forward price-earnings ratio of 60-times. Additionally, the company’s impressively high enterprise value-EBITDA ratio of 111-times won’t have value investors lining up for NVDA stock. Accordingly, between the company’s high valuation and crypto headwinds, I don’t think NVDA stock will deliver tremendous returns over the next six months.
Intel (NASDAQ:INTC), Micron (NASDAQ:MU) and ON Semiconductors (NASDAQ:ON) are three chip makers who also have solid and positive catalysts. However, these chip stocks trade at valuations that are orders of magnitude lower.
Intel’s Habana Labs unit has positioned the company nicely to become a “big player” in AI. Furthermore, I think the company should benefit significantly from Washington’s subsidies. With an enterprise value/EBITDA ratio of just 7-times, that’s the kind of chip stock that makes sense.
Micron has said that it’s also poised to generate a great deal of revenue from AI, while Citi believes that the prices of its memory products will surge in the second half of the year. Like Intel, Micron has an EV/EBITDA ratio of just 7-times.
Finally, ON Semiconductor benefits from the increasing demand for chips by its core auto and industrial markets, while its forward price-earnings ratio is just 18.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
