Downgrade for Nvidia Due to Valuation Issues

Rare Downgrade for Nvidia Due to Valuation Issues Following Rally

Bloomberg) — The explosive rise in Nvidia Corp. (NVDA) since the beginning of the year has now reached its limit, according to analyst Pierre Ferragu of New Street Research.

The AI-focused chipmaker was downgraded by Ferragu from buy to neutral. The analyst stated that the stock is “getting fully valued” after rising by 154% this year and about 240% in 2023. On Friday, shares decreased 1.9% while the Nasdaq 100 Index increased by 1%.

According to Ferragu, further gains “will only materialize in a bull case, in which the outlook beyond 2025 increases materially, and we do not have the conviction on this scenario playing out yet.”

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Even though the “quality of the franchise is nevertheless intact,” he continued, should the current forecast hold true, there is “if anything, a risk of derating.”

This year, Nvidia has outperformed other S&P 500 components, coming in second only to Super Micro Computer Inc. (SMCI), a popular choice among AI investors. With the increase, Nvidia’s market valuation increased by about $1.9 trillion, momentarily making it the largest corporation in the world.

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For a business that has benefited greatly from the surge in artificial intelligence spending, analyst downgrades are uncommon. Approximately 90% of the analysts that Bloomberg follows advise purchasing the stock. But value is frequently mentioned as a worry. By this metric, Nvidia is the most expensive company in the S&P 500 Index, trading at more than 22 times projected revenue for the upcoming year.

Nvidia closed on Friday at $125.82; New Street assigned a one-year price objective of $135.

In addition to Nvidia, New Street highlights the growth trajectories and valuations of Advanced Micro Devices Inc. (AMD) and Taiwan Semiconductor Manufacturing Co (TSM) Ltd. as reasons for optimism.

In a note, New Street stated that among other stocks with exposure to artificial intelligence, Broadcom Inc., Arista Networks Inc., and Micron Technology Inc. all “remain attractively valued.” AMD and TSMC are “the best names to own in the group, offering strong upside in both in our base and high scenarios,” it added.

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