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Nvidia’s Sky-High Ascent Faces Potential Volatility, BofA Cautions

Nvidia, the semiconductor behemoth, has been riding a wave of unprecedented growth, positioning itself as a darling of Wall Street and a top pick for Bank of America research analyst Vivek Arya. However, Arya warns that Nvidia’s meteoric rise could see a significant, albeit temporary, pullback.

As Nvidia gears up to report its earnings on February 21, the market’s bullish sentiment has set high expectations, with buy-side estimates topping consensus predictions by 9% at $21.7 billion for the fourth quarter. This optimism, Arya notes, narrows the room for Nvidia to surpass expectations and exposes it to an 11% implied move post-earnings, according to Bloomberg options data.

Despite the potential for a dip, Arya believes any decline would be short-lived, attributing potential earnings misses to supply-side issues rather than worrisome trends in demand or competition. He anticipates that market volatility surrounding Nvidia will stabilize following the company’s GPU Tech Conference in mid-March, historically a positive catalyst for the stock.

Nvidia’s valuation, standing at 35 times its price-to-earnings ratio, still falls below its median, underscoring the stock’s attractiveness even amid its rapid price escalation. In 2023 alone, Nvidia’s shares have skyrocketed by 250%, fueled by the company’s pivotal role in advancing artificial intelligence technology. This surge has vaulted Nvidia past tech giants Amazon and Alphabet, making it the third most valuable company on the S&P 500.

Arya interprets the fervent investor chase for Nvidia as a blend of “fear and greed” for AI-related stocks. However, he contends that this view overlooks Nvidia’s strategic execution and earnings revisions, which have solidified its market position. Furthermore, Nvidia’s compliance with U.S. mandates to limit chip shipments to China, by redesigning some semiconductors for the Chinese market, demonstrates the company’s adaptability. China represents a significant portion of Nvidia’s revenue, historically accounting for about 20% of its sales.

The potential for a pullback notwithstanding, Nvidia’s stock continues to be a Wall Street favorite, attracting increased investments from firms led by billionaire investors such as Ray Dalio, Paul Tudor Jones, and Stanley Druckenmiller.

For investors and market watchers, Nvidia’s upcoming earnings report and the GPU Tech Conference will be critical events that could influence the stock’s trajectory. As Nvidia navigates the challenges of high expectations and geopolitical constraints, its ability to maintain its growth momentum amidst potential volatility will be closely scrutinized.