We recently published a list of Wall Street Is Focusing on These 10 AI Stocks as New Year Begins. In this article, we are going to take a look at where NVIDIA Corporation (NASDAQ:NVDA) stands against other stocks Wall Street is focusing on as the new year begins.
Dan Niles, Niles Investment Management founder, recently said in a program on CNBC that a slowdown in spending could be a “big problem” for major AI players in 2025. The analyst highlighted that when Satya Nadella was asked whether his company was facing a chip shortage, the head of the Redmond software giant said his company was facing a power shortage, not a chip shortage. Niles said this goes against the claims of Jensen Huang who has been pointing to unprecedented demand for AI chips.
“If you look at the Magnificent 7 (except one) …. they are trading at a low 30 PE. The S&P 500 is trading at a 25 PE, but if you look at the midcap and small-cap stocks, which people have forgotten about because they’re not really AI plays, they’re trading at around 19 to 20 times. They’ve underperformed up until sort of mid-year when the performance picked up. If you look at stocks since June 30th, basically, the S&P is up about 8%, but the NASDAQ 100 is only up 7%. The Russell 2000 is actually up 10% after being only up 1% for the first six months of the year. So you’re already starting to see this broadening out, and I think with the new administration really focused on domestic manufacturing, deregulation, etc., that’s going to benefit the small midcap names more so than names in the S&P 500,” Niles said.
Niles said stocks can face a “rough” time in the first quarter amid the changing posture of the Fed.
“The Fed finally admitted inflation wasn’t transitory. I think that might have been the wakeup call, which is why I think Q1 could be a really rough time for a lot of the, you know, the market as a whole, but a lot of the mega cap stocks as well. As we have to kind of price in the fact that the FED might, you know, they might pause or they might even raise next year, which I think that’s a 50/50 shot of whether they cut, raise, or hold.”
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For this article, we picked 10 AI stocks analysts are talking about heading into 2025. With each company we have mentioned its 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).
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NVIDIA Corporation (NASDAQ:NVDA)
Number of Hedge Fund Investors: 193
Paul Meeks, CIO at Harvest Portfolio Management, said in a latest program on CNBC that believes NVIDIA Corp (NASDAQ:NVDA) valuation is still reasonable despite the stock’s massive run. Here is how he explained his thesis:
“The interesting thing about NVIDIA Corp (NASDAQ:NVDA) from my perspective is people assume that the stock is grossly overpriced because it tripled in 23, working on a triple this year. But their earnings have grown even faster than that, so you have a stock that’s trading around 30 times earnings, probably grow earnings this year another 50%. I don’t know what they’ll do in the out years, but I still think it’s going to be pretty strong growth. And so NVIDIA Corp (NASDAQ:NVDA), not today, not tomorrow, but any dip—and it always comes—is probably a better buy. I would say on a PEG ratio basis, PE to growth, it’s reasonable. It’s not expensive at all.”
Simply beating earnings estimates is not enough for NVIDIA Corporation (NASDAQ:NVDA) anymore, and the impact of high expectations will continue to weigh on the stock as growth cools.
Nvidia’s forward P/E ratio for the fiscal year ending January 2026 is around 31. An EPS surprise of 8.5% was not able to help the stock. A similar trend occurred following the second-quarter earnings after a 5.6% EPS surprise. It’s difficult to see Nvidia maintaining a mid-70s gross margin by the end of 2026. Over the last two quarters, Nvidia has already reported a drop in its gross margin from 78% to 74.5%.
Then there’s competition. Amazon (AMZN) recently disclosed its Trainium 3 chip, which is set to be released by the end of 2025. The chip is expected to be twice as fast with 40% more power efficiency than the previous generation, manufactured on TSMC’s (TSM) cutting-edge N3 technology. Reportedly, technology giant Apple (AAPL) will be a consumer of Amazon’s new silicon.
Manole Capital Management stated the following regarding NVIDIA Corporation (NASDAQ:NVDA) in its Q3 2024 investor letter:
“As of this publication, Nvidia is up roughly 150% year-to-date. NVIDIA Corporation (NASDAQ:NVDA) was the largest gainer in the S&P 500 last year and has more than tripled in value over the last year. It hit an eye-opening market capitalization of $3 trillion in June, less than four months after it eclipsed the $2 trillion mark. Enthusiasm for everything AI-related, especially for the primary chip maker whose products are essential to powering AI technology, continues to fuel the market. Last quarter, and for the fifth consecutive quarter, Nvidia reported sales and profits that blew past Wall Street expectations. The stock rose +37% in the second quarter alone.”
Overall, NVDA ranks 3rd on our list of stocks Wall Street is focusing on as the new year begins. While we acknowledge the potential of NVDA, our conviction lies in the belief that under the radar AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. 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.
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Disclosure: None. This article is originally published at Insider Monkey.