Amid technology juggernaut Nvidia (NASDAQ:NVDA) suffering a steep decline in value on Wednesday, Bank of America analysts sounded the alarm on both the company and the broader artificial intelligence (AI) ecosystem. After being rewarded with robust returns, impatience may spark a selloff in Nvidia stock and other related equities. That’s a huge liability since so much of the market’s performance stems from only a handful of AI stocks.
According to a CNBC report, BofA’s strategist Jared Woodard anticipates profit-taking to materialize in mega-capitalization tech companies during the second half. Primarily, investors may become “impatient for an AI killer app” or for significantly more growth. However, that may be a problem as just four AI stocks account for 50% of market profits since 2021.
In addition, Woodard claims that “[t]he narrow U.S. market rally, premised as it is on extended capex cycles and quiescent capital, looks shaky.” The strategist cited earnings growth projections for exchange-traded funds (ETFs) covering AI stocks, which have dropped 16 points from a peak in February. As the analyst put it, “[i]nvestors are getting restless.”
For NVDA stock, one of the main risks is that each new product chips value away from its older investments. “No one denies the computing power. But after one last frenzied rally around the latest chips, investors may come to doubt the near-term economics,” Woodard mentioned.
Nvidia Stock May Suffer From a History Lesson
At the moment, few analysts are sounding the alarm on Nvidia stock. Per TipRanks, the consensus view stands as a strong buy, breaking down as 37 individual buy ratings and four holds. No one has issued a sell rating. Further, the average price target comes in at $140.85, implying over 19% upside potential.
Since the start of the year, Nvidia stock gained roughly 146%. However, it’s also noteworthy that in the trailing month, shares have lost about 10%. One of the biggest concerns is whether NVDA can deliver against ever-rising expectations. In the past four quarters, Nvidia’s average earnings surprise comes in at 17.03%. However, the magnitude of the earnings beats has been consistently fading.
As CNBC wrote, BofA experts are worried that the true sustained returns from AI may not come until later:
Woodard views AI as the latest example of new technologies over the years that have boosted productivity but struggled to swiftly recover their investment. Referring to railroad growth in the 1800s and the internet craze in the 1990s, he notes that the reward didn’t come until after the bubble burst.
Rather than chasing Nvidia stock and other AI-focused enterprises, BofA believes that long-term investors should consider undervalued ideas. These include small-cap value stocks, utility companies, energy infrastructure and banking institutions.
On the date of publication, Josh Enomoto 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.
On the date of publication, the responsible editor held a LONG position in NVDA.
