- Nvidia’s second-quarter results soared over the high bar it set three months prior.
- Analysts cheered after the print and raised their price targets to astronomical levels.
- But market veteran David Trainer made the bear case and shared three AI stocks that are better buys.
Nvidia has won the hearts of investors, but at least one market veteran refuses to show any affection to the artificial intelligence pioneer.
Wall Street is smitten with Nvidia, the Santa Clara-based semiconductor behemoth that will be the top-performing stock in the S&P 500 in 2023. The company set ridiculously high expectations for its Q2 results, but still managed to crush them when it reported after the bell on August 23.
Nvidia not only beat estimates and more than doubled revenue from the previous quarter, but it also raised the bar for the upcoming quarter far above what analysts expected.
Nvidia was naturally showered with price target increases across Wall Street, despite the fact that its shares are already up 228% year to date. Bank of America expects the stock to rise 35% to $650, while Rosenblatt Securities has set a $1,100 target, implying a 129% increase.
Nvidia could come crashing down after its magical run
However, not everyone on Wall Street believes in Nvidia.
David Trainer, CEO of Nashville-based investment research firm New Constructs, believes that while the chipmaker is impressive, it cannot possibly live up to the unrealistic expectations that have been placed on it.
“Nvidia is the stock market’s new Tesla, where the market blindly assigns a ridiculously high and unrealistic valuation,” Trainer wrote to Insider in an email on August 24. “We are not denying that Nvidia is a great company, but we believe that its valuation is excessive and unjustifiable.”
“Investors should not be chasing Nvidia stock because it is far too expensive,” Trainer continued. Investors should only consider buying Nvidia if the stock falls below $100 per share.”
Nvidia shares haven’t fallen below $100 since mid-2020, though they came close last fall. To reach Trainer’s idea of fair value, the stock would have to fall roughly 80% from its all-time high, which would be a disastrous — but not unprecedented — drop.
Though Nvidia appears to be invincible at the moment, buzzy growth stocks such as Coinbase (COIN), Shopify (SHOP), and Snap (SNAP) were once invincible. Trainer had reservations about all three and was eventually proven correct, though it took some time for his bearish thesis on them to play out.
It’s worth noting that Trainer isn’t down on AI. He believes the technology deserves some attention, but warns that while Nvidia is currently the market leader, it will soon face stiff competition from companies playing catch-up.
“While we recognize that artificial intelligence is an exciting technology and that Nvidia is a great company, investors must pay attention to a company’s valuation,” Trainer wrote. “It makes absolutely no sense to buy Nvidia stock at its current valuation.”
To live up to its current valuation, Nvidia would need to increase revenue by 20% per year for the next 25 years, according to the CEO of an investment research firm. While the chipmaker may be able to outperform that growth for a few years, doing so in the long run will become increasingly difficult.
3 AI stocks to buy instead
Investors who missed out on Nvidia’s meteoric rise must be kicking themselves, but the only feeling worse than missing out on the upside is getting burned on the downside.
Despite the difficulties, Trainer strongly advised Nvidia shareholders to take profits now — and those on the sidelines to remain so.
“Nvidia’s ridiculous valuation achieved over such a short period of time reminds us that ‘fear of missing out’ is alive and well, and that is a very dangerous phenomenon for investors that never ends well,” Trainer wrote. “Investors must exercise caution when allocating capital, as there are good and bad stocks.”
Trainer believes that investing in a trio of stocks related to AI infrastructure, KLA Corporation (KLAC), Photronics (PLAB), and Silicon Motion Technology (SIMO), is one of the smarter ways to play the AI boom. The semiconductor-related firms stand out for having P/E ratios ranging from 11.5x to 20x, while Nvidia currently trades at a whopping 254.4x trailing earnings.