We recently published a list of Top 10 Trending AI Stocks Amid Latest News and Analyst Ratings. Since NVIDIA Corporation (NASDAQ:NVDA) ranks 4th on the list, it deserves a deeper look.
The reality is finally catching up to the AI hype as investors await to see ROI on huge spending on AI chips and infrastructure. Dan Niles, Niles Investment Management founder and portfolio manager, during an interview with CNBC last month, called the decline in Mag. 7 stocks after Q2 earnings representative of a “fundamental shift” in the industry.
“I know it’s popular to talk about AI because these stocks are driving the market, but at a certain point, you want to get a return on all of this money you are investing. And if your forward revenue estimate is going lower not higher but your CapEx is going up, at some point those two things are going to collide.”
Niles said that major tech companies went through a “digestion” period after seeing huge returns during the COVID-19 pandemic days, and he expects the same to happen as we move into the next year.
The analyst said that on an equal-weighted basis, the broader market is up when compared with Mag. 7 stocks. He recommended investors to buy the stocks that would benefit from rate cuts. These include consumer staples, utilities, telecom services, etc.
Niles said the other 493 companies could drive the market to new “all-time record highs.”
For this article, we picked 10 AI trending stocks that are moving after latest analyst ratings and earnings. With each company we have mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
NVIDIA Corp (NASDAQ:NVDA)
Number of Hedge Fund Investors: 179
Dan Niles, Niles Investment Management founder and portfolio manager, said while talking to CNBC that the “poster child” of AI Nvidia’s declines represents a fundamental shift in tech stocks where investors expect ROI.
“During 2021, revenue growth for Nvidia was up 62% year over year.. 2022, revenues were up 6% and the stock went down from peak to trough 66%. If you look at CapEX spending over the last two years and you see Nvidia’s revenues, Nvidia’s revenues last year grew over a 100%, this year they are gonna grow over a 100%, I think what you are gonna see next year is a dramatic slowdown not only from the spending from hyperscalers but also in Nvidia’s revenues as those hyperscalers grow into all of this money that they have spent that’s not actually generating an increase in their revenue.”
What Niles is saying is not new. After Nvidia’s latest quarterly report, here is what InsiderMonkey’s Research Director Inan Dogan wrote in a report:
Nvidia’s market cap before today’s earnings report was $3.1 trillion. This means investors expect NVDA to earn around $140 billion per year once it becomes a more mature company like Alphabet Inc (GOOGL) which is currently trading at a forward P/E multiple of 21. NVIDIA Corporation’s quarterly revenue and profit were $30 billion and $16.6 billion respectively though. Is it reasonable to assume that NVDA’s quarterly profit can go from $16.6 billion today to $35 billion in a few years and then continue to grow at the same rate that GOOGL’s quarterly profit is growing?
Investors were surprised to see that NVDA projected only an 8% quarterly revenue growth rate for its next quarterly report (vs. 15% for the last quarter). The decline in quarterly revenue growth rate is really concerning and if the decline continues, it will be awfully clear to investors that NVDA will never get to the $140 billion annual profit figure that its current stock price is demanding.
Aoris International Fund stated the following regarding NVIDIA Corporation (NASDAQ:NVDA) in its Q2 2024 investor letter:
“If Information Technology was the dominant sector for the quarter, NVIDIA Corporation (NASDAQ:NVDA), which is the largest supplier of microprocessors used for generative AI applications, was the dominant company. NVIDIA’s share price rose by a third in the quarter and has increased by 255% so far this year. Since the beginning of 2023, its market value has risen by 8.3x, or $4.3 trillion, making NVIDIA the third largest company in the world by this measure.
As a result of the unusually strong stock price performance from NVIDIA and a few other large companies, equity markets have become increasingly concentrated. You can see this in the chart below, which shows that on 30 June, 27% of the market value of the 500 largest US companies was attributable to just five companies, more than twice the average of the last 20 years.
The composition of the Aoris International Fund will always be very different to that of the broader equity market. There will be periods, such as the most recent quarter, where this contributes to our performance lagging that of our benchmark. When it comes to NVIDIA and other AI-centric companies, rapid growth is exciting, but it makes it difficult for us to judge what is normal. Our preference is to own established leading companies where we can make a more confident, evidence-based judgement about their growth and profitability.”
Overall, NVIDIA Corporation (NASDAQ:NVDA) ranks 4th on Insider Monkey’s list titled Top 10 Trending AI Stocks Amid Latest News and Analyst Ratings. While we acknowledge the potential of NVIDIA Corporation (NASDAQ:NVDA), our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and Jim Cramer is Recommending These Stocks.
Disclosure: None. This article is originally published at Insider Monkey.