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Nvidia’s Sizzling AI-Driven Rally Flashes a Warning

(Bloomberg) — Of all the stocks that have been supercharged by this year’s artificial intelligence frenzy, Nvidia Corp. stands alone.

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The key supplier of chips required to power chatbots has more than doubled since hitting a two-year low in October, adding more than $370 billion in market value. Now cracks may be starting to appear.

After nine straight sessions of gains through Thursday, the stock has slipped back the last three, after its relative strength index briefly strayed into overbought territory.

“Nvidia certainly looks frothy,” said Dan Eye, chief investment officer at Fort Pitt Capital Group, adding that the stock’s multiples are “a bit too rich.”

Nvidia trades at an eye-watering 56 times projected earnings, nearly three times more expensive than the Philadelphia Stock Exchange Semiconductor Index’s 21 times and a near 150% premium to the Nasdaq 100, according to data compiled by Bloomberg. Nvidia’s average multiple over the past decade is 30 times.

The valuation is “bordering on a little breathless,” said Mark Stoeckle, chief executive officer of Adams Funds.

Nvidia is set to resume its upward momentum on Wednesday, rising 1.6% as chipmakers more broadly extend a year-to-date rally after upbeat forecasts from Micron Technology Inc. and Infineon Technologies AG.

The stock’s rapid ascent isn’t deterring Wall Street analysts. With 42 buy-equivalent ratings, Nvidia has by far the most bullish recommendations of any chipmaker, according to data compiled by Bloomberg. Morgan Stanley upgraded to overweight this month, citing the boost the company is getting from the generational AI “megatrend.”

“When the case is just so compelling, you’ve got to own this,” said Thomas Martin, senior portfolio manager at Globalt Investments, which owns Nvidia shares. “That’s how you get an overbought situation. Are we going to get another 80% from here in Nvidia in three months? No.”

Tech Chart of the Day

The Nasdaq 100 rose 1.3% on Wednesday, putting the tech-heavy gauge on course to snap two days of declines and extend its quarter-to-date gains. The benchmark is up 17% since year-end, setting it up for its best quarter since June 2020 after four straight declines.

Top Tech Stories

  • Micron Technology Inc., the largest US maker of memory chips, gave a better forecast for the current quarter than some analysts had feared, sparking hope that the worst of a brutal industry slump may be over.

  • German chipmaker Infineon Technologies AG raised its revenue forecasts for the quarter and the full year, citing stronger-than-expected demand for its automotive and industrial products.

  • Alibaba Group Holding Ltd.’s overhaul could serve as a template for a restructuring of China Tech itself: a shake-up that achieves Beijing’s aim of carving up the country’s tech titans while unlocking potentially billions of dollars in pent-up shareholder value.

  • Lucid Group Inc. is eliminating 18% of its workforce, including employees and contractors, as the company looks to cut costs in its second full year of production.

  • BYD Co.’s profit more than quintupled last year after the Chinese automaker sold a record number of electric vehicles and stepped up its battle with Tesla Inc. for market share.

–With assistance from Ryan Vlastelica.

(Updates stock moves throughout.)

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