Source: Jin10 Data
Morningstar analysts say any signs of successful alternative development could significantly limit Nvidia's upside potential.
This week, the computer sector of the Shenwan Index fell by 2.54%, underperforming the CSI 300 Index by 1.68 percentage points. As of Q2 2020, the holdings ratio of the computer sector in public funds was 5.34%, close to a three-year high and 0.91 percentage points higher than the standard ratio. Public fund holdings concentration further increased, with a focus on heavyweight stocks such as Yonyou Network. According to statistics of the top ten fund-heavy stocks, the total fund holdings of the computer sector in Q2 2020 amounted to RMB 93.28 billion, accounting for 5.34% of the total fund holdings, a slight decrease from the previous quarter's 5.35%, but still close to a three-year high. Moreover, since Q4 2019, the computer sector's fund holdings ratios in Q1 and Q2 2020 have been 1.20% and 0.91% higher than the standard ratios, respectively, indicating that the sector has received over-allocation from public funds. In terms of individual stock holdings, Hundsun Technologies, Kingsoft Office Software, Glodon, Yonyou Network, Sangfor Technologies, Winning Health Technology Group, Unisplendour Corporation, Shanghai Baosight Software, and Inspur Electronic Information Industry were among the top ten fund-heavy stocks in Q1, with Baosight Software replacing China National Software. Overall, public fund heavy positions in this sector have been relatively stable. Among them, Hundsun Technologies saw a significant increase in Q2 holdings, almost doubling its fund holdings compared to Q1, while Yonyou Network and Winning Health Technology Group saw significant institutional buying for two consecutive quarters. Inspur Electronic Information Industry, Meiya Pico Information and other nine companies were also top ten fund-heavy positions in Q1.$NVIDIA (NVDA.US)$With a surge of over 1000% in stock price since October 2022, the company was once the largest market cap in the US stock market. In the past 12 months, its stock price has risen by 206%.
NVIDIA's bulls believe that there is still room for larger gains. As a leading chip supplier supporting artificial intelligence applications, the company is in a leading position in large-scale technology transformation, and its revenue is expected to double to $120 billion in the fiscal year and reach $160 billion in the next year. In contrast, Microsoft's (MSFT.O) revenue growth is expected to be about 16% this fiscal year.
NVIDIA's stunning stock performance has attracted investors who are afraid of missing out on more profits (FOMO). This has also made NVIDIA's stock valuation higher, with its expected price-to-earnings ratio increasing by 80% this year. This may make the company's stock more susceptible to sharp pullbacks when bad news hits.
Chuck Carlson, CEO of Horizon Investment Services, said: "Its past performance should not affect current investment decisions. But in stocks like NVIDIA, it's hard not to make it a factor in investment decisions, because it gives you a sense of chasing stock prices."
So far, NVIDIA's stock trend has rewarded bulls and punished skeptics. Since 2024, the stock has risen by 164%, and its market value has soared to more than $3.2 trillion, briefly surpassing Microsoft and Apple (AAPL.O) this week.
Optimistic investors pointed out that NVIDIA's dominant position in the AI chip field is the key reason they are optimistic. The high performance of NVIDIA chips makes them difficult to replace in AI data centers. In addition, its proprietary software framework is a tool for developers to program AI processors, consolidating NVIDIA's leading position.
Spear Invest's founder and chief investment officer Ivana Delevska still sees NVIDIA's prospects because she expects its earnings to exceed Wall Street analysts' forecasts. NVIDIA is the top holding of the Spear Alpha ETF, accounting for nearly 14%.
"If the stock price rises like this, but the earnings have not really changed, then we will be very worried," Delevska said. However, "currently, its earnings support is quite solid."
In fact, according to LSEG Datastream data, even if it has grown from 25 at the beginning of the year to now, NVIDIA's expected price-to-earnings ratio is about 45, only slightly higher than its five-year average price-to-earnings ratio of 41. At the same time, this valuation has dropped from 84 a year ago.
Tom Plumb, president of Plumb Funds, believes that NVIDIA chips' opportunities beyond AI are underestimated. The company has held NVIDIA stocks for more than seven years, and it is the largest holding of its two funds. Plumb said: "I'm talking about data and ways to obtain data. They have the fastest and smartest chips."
However, others are cautious about the prospect of NVIDIA achieving amazing returns in the future.
Gil Luria, an analyst at D.A. Davidson, said that NVIDIA has a truly revolutionary product and has achieved unprecedented growth. However, he rated the stock as "neutral" with a target price of $90, compared to the stock's close of $130.78 on Thursday.
Looking ahead to the next few years, Luria said that he doubts whether NVIDIA's customers can spend enough money to drive Wall Street's earnings expectations that support the company's valuation. Luria said: "Cautious about NVIDIA comes from the long-term prospects. It's hard to maintain this performance."
Billionaire investor Stanley Druckenmiller said last month that he had reduced his huge bet on NVIDIA in 2024. "AI may be a bit overrated now, but it's undervalued in the long run."
Carlson of Horizon Investment Services believes that NVIDIA is a "buy" rating, but it will not be included in the investment portfolio of Horizon's approximately 30 stocks due to its relatively expensive stock valuation.
Other concerns include the potential erosion of NVIDIA's market-leading position by competition. Tech giants Microsoft, Meta Platforms (META.O), and Google (GOOG.O) under Alphabet are competing to build AI computing capabilities and incorporate their technology into products and services.
Morningstar analysts give a target price of $105, stating that leading suppliers such as Amazon (AMZN.O), Microsoft and Meta Platforms will ultimately seek to reduce their reliance on NVIDIA and achieve supplier diversification.
Morningstar analyst Brian Colello wrote this month: "Nvidia is leading the AI field today and if it can maintain this lead over the next decade, the company’s profit potential will be unlimited. However, any signs of successful alternative development could significantly limit Nvidia's upward space."
Editor/Lambor