Source: Parth Sanghvi
Is the AI Trade Really Over?
Bernstein analysts have weighed in on the recent chatter about the end of the AI trade, dubbing such concerns as “a little premature.” This perspective comes in light of the recent performance of Nvidia (NASDAQ:NVDA), a leading player in the AI industry. Nvidia’s year-to-date stock performance has retreated by 15%. This slowdown comes after a period of extraordinary returns, placing the company’s recent performance as underwhelming compared to both the broader semiconductor market—which has also pulled back by around 85%—and the S&P 500, which has only seen a 1% drop.
Valuation and Product Cycle Momentum
Nvidia’s recent performance has been marked by a steep plunge of over 8% on Monday. The company’s shares are now trading at approximately 25 times the next twelve months’ (NTM) earnings. According to analysts led by Stacy A. Rasgon, this is the weakest level in a year and is nearing a 10-year low.
Rasgon notes, “In fact, the stock now trades BELOW parity relative to the SOX (something we have seen only once or twice in the past decade), and at only a slight S&P premium, the lowest they have been since 2016.” This pronounced de-rating is especially striking at the start of a new product cycle.
Despite this, Nvidia’s Blackwell product revenues reached a staggering $11 billion in January alone. This signals that supply constraints are easing and demand is poised to outstrip supply in the coming quarters. Capital expenditure from Nvidia’s customers continues to rise, suggesting anticipated growth.
Regulatory Landscape and International Exposure
Despite the positive outlook, regulatory risks still loom over Nvidia. These include AI diffusion rules set to take effect in May and the potential for further bans in China. However, Bernstein analysts point out that Nvidia’s sales in China, while at record levels, are the lowest as a percentage of revenue in the last decade.
The analysts also expect any disruptions stemming from new licensing requirements for Nvidia hardware to be short-term. Even if an H20 ban were imposed—a scenario Bernstein deems unlikely—the estimated impact on Nvidia’s earnings per share (EPS) would be limited to a mid-to-high single-digit figure.
A Cautiously Optimistic Outlook
Despite these challenges, Bernstein remains optimistic about Nvidia’s prospects. They argue that concerns over the AI trade ending are premature, and Nvidia’s valuation is becoming increasingly attractive. With easing supply constraints, robust product cycle momentum, and resilient customer capital expenditures, the fundamentals of the company remain strong.
Historical Performance and Future Prospects
To fully understand the potential of Nvidia, it’s crucial to consider the company’s past performance. By leveraging historical earnings data, investors can gain insights into the company’s earnings trends over time. This provides a better understanding of the company’s performance and its potential for future growth.
Conclusion
In conclusion, while regulatory uncertainties and short-term valuation pressures persist, Bernstein analysts believe that Nvidia is well-positioned for a rebound. The market’s current discount may present an attractive entry point for investors, making the overall outlook for Nvidia more optimistic than the prevailing sentiment suggests. Despite the challenges, the company’s strong fundamentals, combined with an increasingly attractive valuation, suggest that the AI trade is far from over.