Nvidia's valuation peak: Is the AI chip leader losing its lead?

The outperformance of Nvidia Corp. has stalled according to New Street Research analyst, Pierre Ferragu, to cut the AI-focused chipmaker from buy to neutral. Ferragu commented that it felt like the shares of Nvidia were "getting fully valued" after surging 154 per cent this year and almost 240 per cent the previous one. On Friday, Nvidia dropped 1.9 per cent while the Nasdaq 100 Index went up by 1 per cent.

Additional upside “will only materialise in a bull case, in which the outlook beyond 2025 increases materially, and we do not have the conviction on this scenario playing out yet,” Ferragu wrote.

While the “quality of the franchise is nevertheless intact,” there is, “if anything, a risk of derating” should the current outlook remain unchanged, he added.

As much as it has been the second-best performing stock among S&P 500 components this year — trailing just Super Micro Computer Inc.'s gain — Nvidia's valuation has raised flags. Its stock's run, a rise of almost $1.9 trillion in market capitalisation that briefly made it the world's largest company, doesn't come cheap. According to Bloomberg data, Nvidia is trading for more than 22 times its estimated revenue in the next 12 months, making it the richest-valued stock in the S&P 500 Index.

With Friday's close at $125.82, New Street set a one-year price target for Nvidia at $135.

It's not all Nvidia; New Street Research views Advanced Micro Devices Inc. as upbeat, alongside Taiwan Semiconductor Manufacturing Co. Ltd., for the very same reason: positive trends in growth and valuation.

AMD and TSMC are “the best names to own in the group, offering strong upside in both in our base and high scenarios,” New Street said in a note, adding that among other stocks with AI exposure, Broadcom Inc., Arista Networks Inc. and Micron Technology Inc. all “remain attractively valued.”