It’s been a wonderful year for Nvidia (NASDAQ: NVDA) stock holders. The price is up more than 160% in the past 12 months, and a staggering 2,100% over five years.
But over the past month, it’s started to fall back a bit. It’s now down 16% from its all-time high, as the mania for artificial intelligence (AI) might be cooling a bit.
At the peak, Nvidia’s market cap reached $3.6trn. Since then, it’s fallen by more than $400bn.
To put things into the perspective that I can get my head around, that decline alone is about the same as the market caps of AstraZeneca, Shell and Unilever added together, three of the FTSE 100‘s four biggest companies!
Boom or bust?
So what comes next in 2025? Is this just a pause before the Nvidia share price carries on zooming upwards? Or might it be a first faltering stumble before the stock crashes?
I can see reasons to think either could happen. Or something in between.
Nvidia’s meteoric rise has been fuelled by what seems like every CEO who can even spell ‘AI’ investing millions, or even billions, in it. There’s one problem — not everyone seems to know how they’ll turn it into profit, and when they might start making some.
Huge AI investment
US venture capital firm Sequoia estimates that the AI industry spent $50bn on Nvidia chips last year. And that’s just the chips, never mind the rest of the infrastructure.
And that, it says, generated only around $3bn in revenue. Very few companies have built up much in the way of paying AI customers yet. And few have any real handle on how they’re actually going to do it.
But Nvidia knows exactly where its money is coming from, and it’s already making piles of it. Even if a lot of the companies buying chips end up going bust, Nvidia still gets its cash.
Risks ahead
Still, even then, there are factors that could make Nvidia’s current earnings growth rates unsustainable.
Perhaps the main one is competition. Nvidia might have a near monoply now. But Advanced Micro Devices (better known as AMD) and Intel are on the job too, with AMD already claiming it can rival Nvidia’s current chips.
Considering these risks, US business analyst Trefis reckons Nvidia could face a potential fall to $40, for a 70% crash from today. Still, looking at the positives, it also says the stock could soar as high as $300.
Nobody knows
I think it’s fair to say the outlook in the next few years could be volatile.
But what counts is long-term valuation. And Nvidia is currently on a forecast price-to-earnings (P/E) ratio of 46. Forecasts see it dropping to about 30 by 2026.
I don’t see that as too much of a stretch at all, and it could support a healthy long-term future.
What might happen in the next 12 months, however, is anybody’s guess. And the huge uncertainty is enough to keep me away.
