1. NVIDIA Corp (NASDAQ:NVDA)
Number of Hedge Fund Investors: 193
Last month, Jim Cramer talked about the underperformance of NVIDIA Corp (NASDAQ:NVDA) after its quarterly results and countered the bear arguments impacting the stock. Cramer said NVIDIA Corp (NASDAQ:NVDA) still has no competition and other companies are making their own chips because Nvidia has so much demand that it’s struggling to keep up.
“NVIDIA Corp (NASDAQ:NVDA) stock is struggling in a typical post-earnings miasma. We know that nothing’s wrong—we just saw the numbers; they were terrific. Yet, there’s a growing skepticism that things have peaked, that the rate of growth is slowing, that the bank for the buck is lessening, and that the competition is increasing, especially from Amazon. Of course, we hear this every time.
I want to unpack these supposed negatives—not that I know who packed them first. Amazon’s not going to go into the high-end chip business away from Nvidia. It simply needs a regular supply of other chips. NVIDIA Corp (NASDAQ:NVDA) has a shortage because they literally can’t find enough manufacturing capacity to meet the demand, so Amazon makes some of them itself.
What matters, though, is that Nvidia welcomes the competition—if you can call it that. Here’s the deal: OK, NVIDIA Corp (NASDAQ:NVDA) still has the best technology by far, in my view. It has no competitors. Amazon remains a huge, and I am told from both sides, happy customer.”
Simply beating earnings estimates is not enough for NVIDIA Corporation (NASDAQ:NVDA) anymore. The stock fell despite reporting better-than-expected numbers for the latest quarter. However, analysts are sensing a growth slowdown. Nvidia’s Q4 revenue guidance missed the buy-side whisper number of $39 billion, and the company expects gross margins to keep shrinking next quarter. For Q4, non-GAAP gross margin is projected at 73.5%, down from 75% in Q3. NVIDIA Corporation’s (NASDAQ:NVDA) biggest customers, cloud hyperscalers — which account for 50% of its revenue — are increasingly developing in-house AI chips and collaborating with competitors like AMD. This raises concerns about Nvidia’s medium-to-long-term growth in demand and margins.
Columbia Seligman Global Technology Fund stated the following regarding NVIDIA Corporation (NASDAQ:NVDA) in its Q3 2024 investor letter:
“The fund held an underweight position in NVIDIA Corporation (NASDAQ:NVDA) relative to the S&P North American Technology Sector, which was a headwind on performance following impressive returns from the company in 2023 and the first two quarters of 2024. NVIDIA’s stock fell during periods of the quarter after the company reported second quarter earnings. While the earnings came in higher than expectations, investors were concerned that the company did not guide earnings high enough, signaling a potential slowdown in AI buildout. NVIDIA’s demand remains strong and the company has forecast orders for upcoming quarters. The question that remains is whether the company can meet the demand for its AI processors and connectivity chips. Our team continues to remain cautious on NVIDIA’s high customer concentration. Microsoft and Meta have driven a significant amount of the company’s revenue, which presents added risk.”
While we acknowledge the potential of NVIDIA Corp (NASDAQ: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 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.
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