Nvidia (NASDAQ:NVDA) stock was arguably the most important one on the market in 2023. Due to its weighting in the S&P 500 and Nasdaq 100 indices, it had a significant impact on their performance. Both set new all-time highs last year.
Nvidia stock gained nearly 240% last year. It was the fifth largest and the second most influential component in the S&P 500 behind Tesla (NASDAQ:TSLA)
It also was the fourth largest and the most influential component of the Nasdaq 100, just ahead of Tesla. The chip maker reached a $1 trillion valuation as a result. Now it’s a matter of when, not if, it hits $2 trillion.
The Bull Case for Nvidia
As the leading semiconductor company specializing in graphics cards and data centers, AI energized Nvidia’s performance.
Its future performance in 2024 depends heavily on ongoing chip demand, its ability to innovate to maintain a competitive advantage, and whether AI has the legs to keep running higher.
There is an excellent case that demand should grow. Businesses want in on AI, which ought to keep Nvidia busy. And PC sales could rebound with the potential for an AI PC being introduced this year. And the gaming market where Nvidia cut its teeth is showing signs of growth once more.
Higher console sales, more games sold, and an increased number of players point to a recovery in the industry. Nvidia’s Q3 gaming revenue jumped 15% sequentially and 81% year over year.
There is plenty Nvidia is doing right, too. Because Arm Holdings (NASDAQ:ARM) technology is so critical to its own, Nvidia invested in Arm’s IPO.
Regulators prevented the two from merging over antitrust concerns, so this backdoor way of ensuring its access is the next best thing. Nvidia’s recently released Grace Hopper H200 AI Superchip is based on Arm’s architecture.
The Bear Case for Nvidia
NVDA stock already embodies the belief all that will fall in the chip maker’s favor. The stock is priced for perfection. Although only trading for 24 times next year’s earnings, it also goes for 27 times sales and 70 times free cash flow.
With the U.S. blocking the sale and transfer of technology and chips to China and competitors nipping at its AI heels, any hiccup could cause NVDA stock to tumble. The country represents 20% of Nvidia’s data center revenue, one of its most important segments.
Nvidia quickly established itself as the leading AI chip stock but Advanced Micro Devices (NASDAQ:AMD) and more recently Intel (NASDAQ:INTC) released competing processors.
The H200 puts Nvidia back in the lead, but does so at a much higher price. Discounting by rivals could jeopardize NVDA’s lead.
While the gaming market did bounce, the PC segment is still in decline. An AI PC might help, but that could be wishful thinking too.
According to analysts, Nvidia has a median 12-month price target of $650, implying 35% upside in the stock. At least one analyst forecasts Nvidia stock will hit $1,100 per share, more than doubling from its current price of $495 per share.
These optimistic projections are based on the assumption that Nvidia will continue to dominate the AI market, which is expected to grow at a 40.2% compounded annual growth rate between 2020 to 2027.
The question is, how long is AI’s growth sustainable? Right now it’s on a rocket ride but that’s based on it continuing to pay dividends for business. If the hoped-for savings and efficiencies don’t materialize, that could cause demand to drop off the table.
The Verdict on NVDA Stock
Although momentum is in Nvidia’s favor, the stock is not a clear buy in 2024. It will be hard to keep the pace of growth going. The clarity needed regarding China is not imminent. Competition is growing and becoming more intense, particularly on the AI side. AI could be a bubble that bursts in 2024 due to regulatory, ethical, or social concerns.
Yet I wouldn’t be selling shares either. Rather, for investors willing to tolerate the volatility and uncertainty in the market, the chip maker is a hold.
Nvidia is a great company with a strong competitive advantage, but its stock is trading at a significant premium. With the saturation of its core markets, I’d be leery of buying more now
On the date of publication, Rich Duprey did not hold (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.