Wall Street analysts are optimistic about this act of artificial intelligence (AI). Here’s why I’m not.

To say Wall Street analysts are bullish is an understatement Nvidia (NASDAQ: NVDA).

FactSet tracks 64 analyst ratings on the chip designer’s stock. And 51 of those rate Nvidia a buy in that system — the highest grade available, equivalent to a strong buy on most rating platforms. Another nine call Nvidia an overweight opportunity, and the final four settled for a hold. None of the 64 financial firms falls below this level.

The consensus price target is $149 per share, 29% above Nvidia’s current share price. In short, analysts absolutely love the stock and highly recommend buying in the current market.

I’m not so sure, though. Let me tell you why.

Why I own Nvidia stock but don’t buy more

Don’t get me wrong: I own some Nvidia stock and have no plans to sell it anytime soon. As long as the artificial intelligence (AI) boom has legs, Nvidia will be at the forefront of every contract for high-performance AI accelerator chips.

He is the hardware designer behind most of today’s large language models (LLMs), including OpenAI’s revolutionary ChatGPT system. These bona fides are more than enough to keep Nvidia relevant for years to come.

But I’m not interested in buying more Nvidia stock today, and it’s probably a better idea to reduce your holdings if you’ve seen big gains in them over the past couple of years.

I actually took this step in February, locking in a 320% gain on about half of my Nvidia positions over a 20-month period. It wasn’t a perfectly timed sale, but market timing never works anyway.

Nvidia stock has gained 77% since then, and I don’t mind missing out. I’m just happy that I reinvested some of my Nvidia earnings into more promising growth stocks, shielding most of the winning investments from potential price declines.

And I wouldn’t be surprised to see some steep Nvidia price cuts from this high valuation.

Risks Wall Street Could Ignore

Again, top Wall Street pros either disagree with me or are willing to take the risk. This fact does not change my analysis of Nvidia. Stock analysts are not always right, despite years of experience and access to expensive analytical tools.

In this case, many investors shrug off the company’s competition. At the same time, the stock continues to trade at incredibly rich valuations. That’s a bad combination — Nvidia’s market makers are ignoring serious risks that should keep the stock’s valuation in check.

The story continues

What kind of competition does the company face? I can’t cover every base, but here’s a quick overview of some interesting competitors and how they differ from Nvidia’s products:

• Advanced microdevices (NASDAQ: AMD) has its Instinct series of AI accelerators, currently driven by the MI300 chip. These processors offer performance comparable to Nvidia’s best, but with more memory capacity and a lower price per unit. Many cheap processors can outperform a smaller batch of better but more expensive processors.

• The Intel (NASDAQ: INTC) The Gaudi 3 AI accelerator comes with higher performance per watt and more modest cooling requirements. Energy efficiency is a big deal, so this advantage could be the final straw that seals the chip order.

• Recent announcement IBM (NYSE: IBM) The Spyre AI Accelerator was designed to add AI features to Big Blue’s mainframe servers. Expected to launch in 2025, this product will upgrade traditional mainframe workloads with high-performance AI features.

• Mobile chip leader Qualcomm (NASDAQ: QCOM) builds AI accelerators into the latest and greatest processors for smartphones and tablets. This company is attacking the AI ​​opportunity from a very different angle than Nvidia’s back-end focus, perhaps making it more of a partner than a rival. However, Qualcomm’s mobile chips are likely to steal workloads from Nvidia’s more centralized and cloud-based computing clients, earning design dollars that might otherwise have gone into Nvidia’s coffers.

Moreover, many of these AI accelerator rivals also compete with Nvidia for manufacturing capacity. AMD, IBM and Qualcomm all rely on the same third-party chip foundries to turn their designs into physical chips, often clashing with Nvidia’s demands for chip manufacturing capacity. Intel prefers its own chip manufacturing facilities, which could give old Chipzilla a practical advantage if AI chip orders ever overwhelm regular manufacturing specialists.

Why Nvidia could face a price correction

It’s easy to imagine a world where one or more of these well-known alternatives carve out lucrative niches in the AI ​​accelerator market, undermining Nvidia’s early lead along the way. Moreover, many market watchers have begun to question how valuable generative AI services are to consumers and corporate customers at the other end of Nvidia’s revenue funnel. What if this booming AI market turns out to be a burstable bubble?

Those risks may not be too big, but then again Nvidia seems poised for a price correction on smaller competitor gains or overall market slowdowns. The stock trades at 30 times sales and 62 times free cash flow — valuation ratios normally reserved for fast-growing software companies.

I’m not saying the stock is doomed to crash anytime soon. At the same time, I’m not convinced it can avoid a dramatic price correction much longer. So I’ll own a few shares after pocketing a generous two-year profit for more than half of my initial investment. With a modest amount of skin in the game, I’m happy to watch Nvidia from the sidelines as the generative AI business evolves.

And that’s why I’m not an Nvidia bull right now, unlike the vast majority of Wall Street analysts.

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Anders Bylund has positions in Intel, International Business Machines and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia and Qualcomm. The Motley Fool recommends Intel and International Business Machines and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.

Wall Street analysts are optimistic about this act of artificial intelligence (AI). Here’s why I’m not. was originally published by The Motley Fool