Nvidia Stock Slips. Why Wall Street Still Loves the Shares.

Nvidia has grown from being a specialist in hardware for videogaming to the leading artificial-intelligence chip company. (Dreamstime)

Nvidia stock was falling on Friday. While Wall Street was enthusiastic about the chip maker’s earnings report, worries about an artificial-intelligence bubble look to be holding back the stock.

Nvidia shares were down 3.2% at $174.46 in morning trading, while the S&P 500 was down 0.8%. The stock fell 0.8% on Thursday.

Investors are still digesting Nvidia’s earnings report, which beat expectations overall but included a miss in the all-important data-center segment as the company faces an effective ban on hardware sales in China.

While Nvidia is still hopeful of being able to resume sales in China in future, other companies are looking to fill the gap. China’s biggest cloud-computing company, Alibaba, has developed a new AI chip to carry out a broader range of task than its previous in-house processors, according to The Wall Street Journal. Alibaba didn’t immediately respond to a Barron’s request for comment.

Wall Street is largely looking past the Chinese market issue to focus on its robust demand outlook. The average target price on Nvidia stock now stands at $210.42 according to FactSet, after a raft of analyst upgrades.

Benchmark Research’s Cody Acree is one example, raising his target price on Nvidia to $220 from $190 in a research note and keeping a Buy rating on the stock.

“We believe Street estimates had recently become overly optimistic, creating an almost impossible bar where even 56% Y/Y [year-over-year] growth appears to be somewhat disappointing, particularly during a period of heightened Chinese uncertainty, we believe Nvidia’s results are consistent with its previous objectives and are in no way indicative of a slowdown in industrywide AI interest or investments,” Acree wrote.

Barron’s has also written positively about Nvidia’s results, noting the ramp up of its rack server systems, the potential for China sales to resume in future, and a relatively undemanding valuation compared with its growth.

However, there still look to be worries about the potential for a bubble in AI investment. Michel Lerner of UBS HOLT —a data-analytics platform— noted this week that the valuation of AI stocks is closing in on dot-com boom levels.

“Whereas dot-com multiples were often bid up due to low earnings among internet plays, the dilemma with AI plays today is over cash flow resilience/growth from high levels,” wrote Lerner. “Inflated valuations nonetheless leave little room for cash flow disappointments, in a context where multiple unknowns could yet weigh on the medium term CFROI [cash flow return on investment] and growth trajectories of AI players.”

Among other chip makers, Advanced Micro Devices was down 3.3% and Broadcom was falling 3.9% in morning trading.

Write to Adam Clark at adam.clark@barrons.com