Risks Accelerate For Overheating AI Darling

“When most people come to believe the same thing, large gaps open up between price and value.”

That’s how Michael Mauboussin described the connection between broad consensus and price. 

This happened at the top of every bubble with everything from real estate to pot stocks to NFTs.

Now it’s happening again to a company that has everything going for it.

It’s at the forefront of the generational investment to buildout AI processing.

The company is NVIDIA (NVDA).

And it may seem crazy now, but this stock is our top contrarian pick of 2024. 

Here’s why.

Popularity Doesn’t Pay

NVIDIA soared 269% in 2023. 

The major growth has made it one of the most popular stocks on Wall Street. 

It’s gotten to the point it’s tough to find a Wall Street analyst with even a cautionary word to say about it…let alone a bad word. 

In fact, just three of the 52 analysts covering do not have a “Buy” rating on it. 

The rest are in a race to see who can be the most bullish.

The analysts are predicting another blowout year for NVIDIA too. 

Even the most bearish analyst on NVIDIA with a published price target actually expects the stock to rise 7%. 

The rest average out to gains of 33%.

And the most bullish expects 120%.

The last one there is absolutely crazy to us.

That’s because if it did rise another 50%, this company would be more valuable than true mega-giants like Google and Amazon.

Another 120% would put it up near Apple and Microsoft along with the world’s most valuable companies.

Here’s why that’s, to put it mildly, unlikely to happen.

Priced For Perfection

The problem with NVIDIA is not its fundamental business.

You’d be hard-pressed to find a company in a more ideal position. 

NVIDIA makes the world’s best AI-chips in the middle of a global AI-processing buildout.

The problem is NVIDIA’s current valuation and its complete disconnect with the value of its core business.

Consider this.

After NVDIA shares run-up last year the company has market cap of $1.2 trillion.

That value makes it the fifth most valuable company in the S&P 500. 

It rests right below Amazon and above of Meta (Facebook) in the S&P 500 rankings.

Now, NVIDIA’s revenues are a fraction of these market-dominating companies.

For example, in the last 12 months NVIDIA generated $44 billion in annual sales.

That’s much closer to Coca-Cola ($45 billion in revenue) than Amazon $550 billion.

Heck, it’s nowhere close to Google (7X more), Microsoft (5X more), and Meta (3X more).

Granted, none of those companies are growing like NVIDIA. 

But right now the average growth forecast for NVIDIA is a 109% increase to $92 billion in revenues.

That’s definitely possible…

But with sky-high expectations like that, any slip or misstep in growth could lead to a major sell-off in the stock.

We already saw it drop 20% last year and the next drop could be even worse.

How To Know When To Sell A Stock:
Priced For Perfection

We know NVIDIA is overvalued. 

The company may be able to deliver on the staggeringly high expectations.

It may be able to keep its lead ahead of its competition. 

But there few companies have succeeded in meeting these kind of growth expectations.

Especially companies engaged in manufacturing at the highest technological level.

That’s why we have to warn about NVIDIA shares now.

There’s just a lot more risk than reward at this point in NVIDIA’s growth cycle.

Even if the company just grows at 80% next year, the stock could end the year significantly lower than it is today. 

We look at every buy from the risk and reward perspective and NVIDIA has a lot more risk than potential reward at the current price.