Nvidia Blockbuster Rally To Slow on 2024 amid China Headwind and Valuation Concerns
Nvidia is unlikely to replicate the stellar performance that has seen its share price more than tipple and become a trillion-dollar company next year. That’s the sentiment echoed on Wall Street as the stock has struggled to rally at an explosive pace as it did early in the year on delivering better-than-expected earnings in the last two reports.
China Headwind
While the stock has rallied by more than 220% in 2023, analysts only expect the stock to rally by 36% in the next 12 months. While it is a significant return, it is still less than the blockbuster year the company had 2023 on benefiting from the artificial intelligence boom. The chip giant has emerged as the poster child behind the revolutionary technology owing to the strong demand for its graphic processing units.
The stock has come under immense pressure in the recent past, with a share of the company dropping by nearly 4% on growing concerns over escalating US chip curbs that could sap growth in China. It has struggled to find support above the $500 a share level, with analysts attributing the weakness to the company pushing back on the release of a new artificial intelligence chip destined for China until next year
The company has to redesign the chip for the Chinese market while simultaneously trying to comply with the US export rules. The pushback comes from the US Commerce Department reiterating tightening rules that target Chinese access to AI and other advanced technologies. The new curbs will focus on the most high-tech chips that remain banned for export without a license.
China remains the company’s third largest market, and any standoff with the US could significantly take a toll on Nvidia’s prospects of curtailing the AI-driven boom. Nvidia has already acknowledged that increasing tension between China and the US over chip technologies could result in tighter export controls that could affect its business. Nevertheless, the company still projects revenue of $20 billion for the current quarter, beating analysts’ consensus estimates by over $2 billion.
Nvidia Outlook
After rallying by more than 200% year to date, there have been growing concerns about Nvidia’s stock valuation. Many have questioned the premium valuation as the company faces stiff competition from other chip giants investing in chips needed to power the artificial intelligence revolution.
Nevertheless, NVidia stock still trades at an earnings per share multiple of around 23 times its consensus forecast earnings for 2024 and 20 times forecast earnings for 2023. It’s the fact that the stock is cheaper than Apple and Microsoft that has continued to fuel bullish bets on the stock.
Analysts at Melius Research have already reiterated a buy rating on the stock with a $750 price target, implying a gain of nearly 50% from current levels. The average price target on Wall Street is $668. However, after a 220% plus rally, the bar is exceptionally high, presenting a significant challenge heading into 2024. Similarly, headwinds like China could become a big problem that could rattle stock sentiments and prospects in the market.
