Nvidia (NASDAQ:NVDA) stock was one of the best-performing names of 2023, with a staggering gain of more than 240%. This year looks good too. The chip maker has been riding high on the booming demand for its artificial intelligence solutions.
While there are several reasons investors should be optimistic about NVDA stock, investors should also be wary of the company’s rich valuation.
AI Explosion and NVDA Stock
Nvidia dominates in both gaming GPUs and AI chips. Nvidia had an 81% market share of AI chips used in cloud and data centers.
The chip maker’s CUDA platform provides a unified framework for developers to create and run AI applications on its GPUs. Also, Nvidia’s TensorRT software enables fast and efficient inference of AI models on edge devices.
Nvidia recently announced a $1 billion deal to provide India-based companies with its AI chips. Some of these Indian companies include conglomerates like Reliance Industries and Tata Group, both of which are focusing on large language models and cloud infrastructure.
Nvidia will benefit from emerging economies like India due to limited access to China.
AMD’s Still Lags
Advanced Micro Devices (NASDAQ:AMD), Nvidia’s main GPU competitor, is slated to enter the AI chip race in 2024.
Last year, AMD announced how it would tackle the AI market. In particular, during their second-quarter earnings report, the chip maker finally announced the MI300x GPU chipset, which will compete directly with Nvidia’s A100 and H100 chips used to train LLMs.
The chip maker announced it expects to sell $2 billion in AI chips next year. While this news is great for both AMD and its investors, it is not yet clear how AMD plans to tackle a market already dominated by its rival. As stated in the prior section, Nvidia controls a vast majority of the AI chip market.
AMD’s entrance into the AI chip market will ultimately require a lot of time and investment, giving Nvidia an upper hand for the short run, at the very least.
NVDA’s High Valuation
Although the optimism around Nvidia is warranted in many aspects, investors may begin to question the chip maker’s valuation. Shares have already risen more than 10% since the start of 2024, outpacing both the S&P500 and the Nasdaq.
This means NVDA’s already frothy valuation has become even more expensive than it was before. Nowadays, Nvidia trades at a 28.1x forward earnings, which is definitely not cheap compared to other large cap stocks.
Investors will have to decide whether the AI ‘craze’ demands this kind of multiple premium. They should also prepare themselves for any significant correction in the company’s share price and valuation.
On the date of publication, Tyrik Torres did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.