It's been quite the year for artificial intelligence (AI) chipmaker Nvidia (NASDAQ: NVDA), which has seen its stock rise more than 161% year to date. Over the last five years, Nvidia's stock is up by more than an astounding 2,560%.
In doing so, Nvidia has reached a nosebleed valuation and now trades at 40 times forward earnings. Investors believe that Nvidia's stock doesn't have a ceiling right now, considering the potential of AI to disrupt life as we know it.
However, one Wall Street analyst is certainly not ready to call it quits yet. He thinks Nvidia is poised for a big year ahead. Here's why.
A growing total addressable market
William Blair analyst Sebastien Naji initiated coverage of Nvidia on Wednesday, with an "outperform" rating and a $162 price target, implying 41% upside from Nvidia's stock price of roughly $115 on Wednesday morning.
Naji's thesis is that the market has yet to price in Nvidia's total addressable market for the broader semiconductor market and is currently only considering the total addressable market (TAM) from graphic processing units, which is Nvidia's bread and butter.
"Nvidia's technical differentiation extends beyond building state-of-the-art processors to include fully integrated systems," Naji wrote in his initiation coverage. "Specifically, Nvidia has built a deep software ecosystem ... and developed core competencies in networking (through its acquisitions of Mellanox and Cumulus), systems engineering, and supply chain management."
Specifically, Naji only sees a TAM of about $100 million for graphic processing units. But the TAM for the broader semiconductor could be eight times bigger, he estimates, while the TAM for cloud services could be 16 times bigger.
While I would agree that we don't yet know the potential of AI, I do start to worry about stocks with these huge valuations because the margin for error becomes very narrow. Also, estimating the size of TAMs and what specific companies can capture is not easy. Long-term shareholders can certainly buy Nvidia, but I wouldn't be surprised to see a pullback or some volatility in the near term.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
