A Major Correction Coming for Nvidia Stock? The Potential Trigger to Watch.

Daily Trade

For now, Nvidia’s (NASDAQ:NVDA) chips, which other companies use to create AI, are considered vastly superior to those of NVDA’s competitors. As a result, Nvidia can charge exorbitant amounts for those chips. But the AI chips of one of Nvidia’s major competitors, Intel (NASDAQ:INTC), appears to be starting to gain great respect in the marketplace, while another competitor, AMD (NASDAQ:AMD), has launched a new offering that could become popular. This will have important implications for NVDA stock holders.

Meanwhile, all three major cloud services providers, Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) — have launched their own AI chips, and several other major firms could follow suit. Given these points, I think there’s a very good chance that the prices firms are willing to pay for Nvidia’s chips will drop greatly in 2024, resulting in a 15%-25% pullback by NVDA stock at some point next year.

Intel and AMD Have Launched Credible Alternatives

After analyzing the results of data presented by Nvidia, tech website STH has concluded that Nvidia’s H100, its top AI chip, is twice as fast as Intel’s Gaudi 2 AI chips. However, the Gaudi 2 semiconductors sell for “less than half the price” as the H100 and have “a much simpler system architecture,” according to STH. Moreover, in terms of total lifetime expenses, the publication reported that Gaudi 2 has an even greater cost advantage over H100. Also noteworthy is that the Gaudi 2 chips are “supply-constrained, but less so than the H100.”

The fact that the Gaudi 2 chips are “supply constrained” strongly suggests that many companies already see them as a viable alternative to the H100. I believe that, throughout 2024, as the huge rush to develop AI services eases somewhat, more firms will opt for the much cheaper but still proficient Gaudi chips. As a result, the prices of Nvidia’s offerings will drop meaningfully.

Moreover, Intel’s Gaudi 3 chips, expected to debut in 2024, will have much more memory than their predecessor. This development is expected to “lead to serious performance gains in AI learning and training” for Gaudi 3 versus Gaudi 2. As a result, the Gaudi 3 is expected to hold its own versus Nvidia’s new offering, the H200, which is also expected to launch next year.

Meanwhile, AMD has introduced its own AI chip, creating another alternative for those companies looking to avoid paying extremely high prices for Nvidia’s offerings. AMD claims that, compared to the H100, the product provides “comparable AI training performance and significantly higher AI inferencing performance.”

The Cloud Providers Are Launching Their Own AI Chips

In November, The Verge, a well-known tech news website, reported that “Microsoft has built its custom AI chip that can be used to train large language models and potentially avoid a costly reliance on Nvidia.”

Similarly, Alphabet has created a suite of chips “designed to train large AI models. And not wanting to be left out, Amazon has launched its chips, which it will use “for training AI systems.”

In order to avoid paying Nvidia’s current exorbitant prices, more major companies could start developing their own AI chips.

Valuation and the Bottom Line on NVDA Stock

NVDA stock is changing hands for 65 times earnings and 27 times sales. Those are exorbitant valuations for a large company.

Given my belief that NVDA is likely to be hurt by meaningfully lower prices for its AI chips and a curtailment of the crypto craze in 2024, I continue to rate NVDA stock a “Hold.” In other words, I advise investors to wait for a major pullback of the shares before buying more of them.

On the date of publication, Larry Ramer held a long position in INTC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been PLUG, XOM and solar stocks. You can reach him on Stocktwits at @larryramer.

Articles You May Like

Stock-market investors cheered end of election uncertainty. Policy uncertainty remains.
Processed food stocks fall as investors brace for increased scrutiny under Trump, RFK Jr.
Snowflake’s stock flies higher as software company’s outlook impresses
Cathie Wood says her ‘volatile’ ARK Innovation fund shouldn’t be a ‘huge slice of any portfolio’
Top Wall Street analysts are upbeat on these stocks for the long haul