Nvidia stock could rise 41%, says one Wall Street analyst
Despite the stock’s big run-up, one Wall Street analyst still thinks there’s room for upside.
This has been a very interesting year for artificial intelligence (AI) chipmakers. Nvidia (NVDA 4.83%)The stock is up more than 161% this year. Over the past five years, Nvidia’s stock is up an incredible 2,560%.
In doing so, Nvidia has received a huge valuation and is now trading at 40x forward earnings. Investors believe that Nvidia’s stock price currently has no upper limit, given the potential for AI to disrupt life as we know it.
But one Wall Street analyst isn’t ready to stop yet. He thinks Nvidia is poised for a big year ahead. Here’s why.
Growing Total Addressable Market
William Blair analyst Sebastian Nagy initiated coverage of Nvidia on Wednesday, giving it an “outperform” rating and a $162 price target, implying a 41% upside from Nvidia’s stock price of around $115 Wednesday morning.
Naji’s theory is that the market does not yet reflect NVIDIA’s total addressable market in the broader semiconductor market, and currently only considers the total addressable market (TAM) of NVIDIA’s main business, graphics processing units.
“Nvidia’s technological differentiation extends beyond building cutting-edge processors to include fully integrated systems,” Naji wrote in his inaugural article. “In particular, Nvidia has built a deep software ecosystem… and has developed core competencies in networking (via its acquisitions of Mellanox and Cumulus), systems engineering, and supply chain management.”
Specifically, Naji sees the TAM for graphics processing units at only about $100 million. But he estimates that the TAM for broader semiconductors could be eight times larger, and for cloud services, 16 times larger.
I agree that we don’t yet know the potential of AI, but I start to worry about stocks that are given such huge valuations. The margin of error is very narrow. It’s also not easy to estimate the size of the TAM and what a particular company can capture. Long-term shareholders can certainly buy Nvidia, but I wouldn’t be surprised if there is a short-term decline or volatility.
Bram Berkowitz has no position in the stocks mentioned. The Motley Fool has a position in and recommends Nvidia. The Motley Fool has a disclosure policy.
