Despite a significant increase in its stock, one Wall Street analyst believes there is still potential for growth.
Nvidia, an AI chipmaker, has experienced a substantial stock rise of more than 161% year-to-date. Over the past five years, Nvidia’s stock has surged by over 2,560%. This impressive performance has led to Nvidia reaching a high valuation, currently trading at 40 times forward earnings. Investors remain optimistic about Nvidia’s future, considering AI’s potential to substantially alter numerous aspects of life.
However, one Wall Street analyst, Sebastien Naji of William Blair, maintains a positive outlook for Nvidia, predicting a promising year ahead. Naji initiated his coverage of Nvidia with an “outperform” rating and set a price target of $162, suggesting a 41% increase from the stock’s price of approximately $115 as of Wednesday morning.
Naji argues that the market has not yet fully factored in Nvidia’s total addressable market (TAM) for the broader semiconductor sector, focusing instead on the TAM for graphic processing units (GPUs), which are Nvidia’s primary product. Naji emphasized Nvidia’s broad technical capabilities, which extend beyond advanced processors to fully integrated systems. These include a comprehensive software ecosystem and developed core competencies in networking, systems engineering, and supply chain management—enhanced by acquisitions such as Mellanox and Cumulus.
According to Naji’s estimates, the TAM for GPUs stands at about $100 million. However, he suggests that the TAM for the broader semiconductor market could be eight times larger, while the TAM for cloud services could be 16 times larger.
While acknowledging the vast potential of AI, there are concerns about stocks with high valuations, as these conditions leave little room for error. Additionally, estimating TAMs and determining the market share individual companies can capture is challenging. Though Nvidia remains a viable long-term investment, potential volatility or a market pullback in the near term should not come as a surprise.
Bram Berkowitz, the author, holds no position in any mentioned stocks. The Motley Fool has positions in and recommends Nvidia and follows a disclosure policy.
