NVDA Stock Analysis: Why Most Of Nvidia's AI-Driven Upside Potential May Already Be Discounted

NVIDIA Corp. NVDA has been the best-performing stock of the Nasdaq 100 index since the start of the year.

The Santa Clara, California-based company's shares are up 84% and its market cap nearly doubled from $280 billion in mid-October 2022 to $658 billion at the end of March 2023.

Much of the excitement about NVDA stems from the growing potential for growth in the application of its chips in artificial intelligence (AI).

Last week at the GPU technology conference, Nvidia CEO Jensen Huang revealed a broad range of collaborations and technologies that enable the newest generative AI services with Nvidia's chips.

"Generative AI has triggered an inflection point in technology," Huang said. "It is genuinely a new computing platform," which will increase demand for the company’s chips.

Wall Street Loves NVDA, But Valuations Appear Stretched

Wall Street analysts have upped NVDA price targets in recent weeks.

Bernstein analyst Stacy Rasgon maintains an Outperform rating for Nvidia stock, boosting his price target from $226 to $300 on Tuesday.
UBS' Timothy Arcuri, who has a 77% prediction score in Benzinga's Analyst Stock Ratings tool, boosted the chip manufacturer's stock price target from $270 to $315 on Monday.

Yet, based on several of NVDA's key metrics, this company may have already priced in a significant portion of its potential gain.

NVDA is now trading at 154 times its last twelve month profit (P/E LTM) and 59.5 times its future twelve month projected profits (P/E NTM). As shown in the graph below, these two crucial valuation metrics are well over their five-year average.

Despite the fact that NVDA presently has 26 Buy and 10 Strong Buy ratings from a total of 48 Wall Street analysts covering the company, the stock is trading practically at par with the average analyst's price target.

This indicates that if the firm fails to continue to exceed analyst estimates, a good chunk of the potential return has already been factored into current market prices.

Will NVDA Drop After Reaching The Sky? Yes, According to Technical Mean Reversion

So far, the first quarter of 2023 has been Nvidia's best quarter since the dot-com bubble, with an 84% increase, considerably over the 55% gain in the fourth quarter of 2016.

Taking a look at the technical picture, we can see that the price is now trading 56% above the crucial 200-day moving average and more than two standard deviations away from this mean.

The last time such a large divergence from the 200-day moving average occurred was in November 2021, when NVDA reached an all-time high before plummeting precipitously.