Concerns about AI Impact on Wall Street
Wall Street is expressing concerns about the impact of artificial intelligence (AI) on the market, particularly related to Nvidia. Analysts compare it to Cisco's dot-com boom experience.
Wall Street is expressing growing concerns that the gains associated with artificial intelligence (AI) could potentially lead to a market bubble. It's crucial for investors to avoid jumping on a hot trend at its peak, only to watch the stock plummet in a devastating market crash.
The skepticism surrounding AI's impact has led many to scrutinize Nvidia (NVDA), the company that has emerged as the biggest beneficiary in this space. Analysts are drawing parallels between Nvidia's trajectory and Cisco Systems' (CSCO) fate during the dot-com boom when its stock collapsed. Notably, Cisco's stock has yet to recover to its previous peak in 2000.
However, New Street Research believes that Nvidia's circumstances differ significantly from Cisco's internet bubble selloff. Analyst Pierre Ferragu, reiterating a Buy rating for Nvidia shares, maintains a price target of $635.
"Is there 'Cisco risk' for Nvidia? We don't think so," Ferragu stated confidently. Unlike Cisco, Nvidia is not trading at a "bubble valuation," and its downside risk is more limited.
On Monday, Nvidia shares enjoyed a 3% increase, reaching $447.93.
Ferragu highlights the differences in revenue growth between the two companies during the dot-com boom. Cisco's revenue surged 15-fold, with its share price reaching 121 times the expected earnings for the next 12 months and 22 times forward revenue. In comparison, Nvidia's revenue has grown approximately seven times, with its shares valued at 27 times forward earnings and 14 times sales.
If Wall Street becomes disappointed with Nvidia's revenue in 2025, Ferragu estimates that the stock could potentially fall by around 20%. This assumption accounts for a 33% reduction in profit expectations, resulting in a valuation drop to the previous low of 30 times forward earnings experienced after disappointing results in the past.
In conclusion, while concerns persist regarding the impact of AI on the market, analysts are optimistically asserting that Nvidia is not heading towards a catastrophic bubble burst like Cisco experienced during the dot-com era. As the sector evolves, it will be vital to closely monitor Nvidia's revenue performance to ensure an accurate assessment of its long-term prospects.
According to industry experts, Nvidia, the leading chip manufacturer, is already priced with a certain level of risk and a probable deceleration beyond 2024. However, if concerns about 2025 diminish, there is still significant appreciation potential for the stock.
When it comes to AI projects, Nvidia is the dominant player in the market for chips. Comparing Nvidia to Cisco, a leading networking hardware company, underestimates Nvidia's strong technological leadership and expertise in AI. Nvidia offers a more advanced multilayered infrastructure that includes both hardware and software components, rather than simply being an internet data router.
Nvidia's chips have become the preferred choice for both start-ups and corporations due to its robust software programming ecosystem known as CUDA. Over the past decade, developers have been building and sharing AI-related tools and software libraries on Nvidia's proprietary platform, facilitating the rapid development of AI applications.
Moreover, the shift towards AI infrastructure is only getting started. Recent reports suggest that the technology industry is still in the early stages of a spending shift towards AI. Currently, only 10% of cloud servers are equipped with chips suitable for AI projects.
Ultimately, this indicates that Nvidia has significant room for growth. The company has a greater opportunity to enhance the performance of its chips and further develop its AI software capabilities compared to what Cisco has achieved with networking hardware.
In conclusion, Nvidia's dominance in the market, its robust software programming ecosystem, and the growing shift towards AI infrastructure position the company for continued success and expansion in the coming years.