Nvidia fades, OpenAI soars. Time to take the temperature of the AI boom
Contributor since / Followers
J Studios
Earlier this week, reports surfaced that OpenAI was in discussions for a $6.5B funding round that would value the high-profile AI startup at $150B. This valuation was up sharply from earlier this year — in February, the firm reportedly allowed its employees to sell shares at an $86B valuation.
The news came at a contemplative time in the AI field, with a growing chorus of analysts questioning whether the excitement of the early days of AI had become too frothy, with valuations in the sector overstretching current market realities for the technology.
That can be seen in this year’s stock price performance for Nvidia (NASDAQ:NVDA), which has become the face of the AI boom in the public market. Shares surged from a price of $49.52 at the close of the last trading day of 2023 to a high just above $140 in June. That represented a surge of over 180% in under six months.
Since then, the stock has stagnated. Profit-taking took NVDA below $100 for a brief period in the first half of August. Since then, it has settled in a range, closing Friday at $119.10.
The official stance of Wall Street analysts remains overwhelmingly bullish on NVDA. Of the 60 analysts tracked by Seeking Alpha, 46 have Strong Buy ratings and another 10 give the stock a Buy.
Still, many market watchers have grown more cautious. The consensus recommendation of analysts publishing on Seeking Alpha currently stands at a Hold, with 13 out of 52 issuing a Sell or Strong Sell rating. Seeking Alpha’s Quant Rating is similarly neutral, with A+ grades for growth and profitability undercut by an F for valuation.
“The risk of a ‘lost decade’ for Nvidia is extremely high and people holding the stock might consider selling (at least a part of) the position,” Daniel Schönberger, an SA analyst who gives NVDA a Sell rating, argued. “And if sentiment turns, it is also extremely difficult to determine how far the stock might fall.”
“To be fairly valued, the company has to grow its free cash flow between 22% and 23% in the next ten years, followed by 4% growth until perpetuity,” Schönberger estimated. “I don’t think Nvidia will grow the bottom line (or free cash flow) by 23% annually for the next ten years and the stock is just overvalued at this point.”
That sentiment is echoed by fellow SA analyst David Ksir, who said, “While the AI opportunity is huge, it’s unlikely that it will translate into significant earnings overnight. Specifically, I worry that investors may have gotten ahead of themselves (again), similar to the early 2000s and the dot-com bubble.”
Even with these warnings, there are signs that NVDA’s recent stock-price movement signals more of a consolidation than the looming bursting of a bubble.
As we have seen, OpenAI has seen its valuation balloon 74% since February, climbing from $86B to $150B. Even with its pullback in recent months, NVDA remains about 90% higher since the start of February, similar to the improvement OpenAI has seen in the same timeframe. Meanwhile, NVDA remains about 150% higher on a year-to-date basis. On a three-year basis, shares have jumped more than 400%.
“Nvidia has strong growth potential to justify its high valuation,” SA analyst Yiannis Zourmpanos stated. “Nvidia’s market position in AI, too, justifies such expectations, while generative AI and autonomous vehicles are some of the trends that will keep up this growth.”