Nvidia is closing in on Amazon's market cap as the red-hot rally moves forward

(Bloomberg) — Nvidia Corp. shares have risen so much this year that they now threaten to overtake Amazon.com Inc. To become the fourth largest American company by value.

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Having added nearly Tesla Inc.'s market cap. Entirely in just the past two months, Nvidia is worth $1.74 trillion, just shy of Amazon's $1.77 trillion. Alphabet, which owns Google, is the third most valuable US company after Microsoft Corp. And Apple Inc., isn't too far behind at $1.83 trillion.

Shares have risen more than 40% so far in 2024 amid signs that demand for its chips used in artificial intelligence computing remains strong. But the stock has continued so far, so fast that it has reignited concerns about whether the gains are sustainable, ahead of Nvidia's earnings due later this month.

Nvidia stock rose 1.2% on Friday.

The increase prompted Michael Cugino, head of the portfolio's permanent fund family, to sell some Nvidia shares.

“There is so much money chasing it that we thought it would be prudent to trim our position a little bit,” he said in an interview. “She still has a good future, but she is very rich.”

Its value, which spent the second half of 2023 steadily declining as Wall Street earnings expectations swelled, is now rising again. Nvidia's price to estimated earnings has risen to nearly 34 times, compared to 25 times at the beginning of the year and around its highest level in months.

Nvidia is the best-performing component of the Nasdaq 100 this year, just as it was during 2023, when shares more than tripled. The stock is by far the biggest outperformer among members of the so-called Magnificent Seven, largely because it showed the most significant jump in sales and profits as a result of AI-related demand.

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It's not as if Wall Street is losing faith in Nvidia's earnings growth. Analysts' average estimates for adjusted earnings for 2024 have risen 14% in the past three months to more than $12 a share. The upward revisions simply haven't kept up with the stock, which has added about $600 billion in market cap over the same period.

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Nvidia's complications barely reach nosebleed levels. Compared to other big tech stocks, it's in the same league with Microsoft and Amazon and cheaper than Tesla. However, the valuation, coupled with the magnitude of its rise over the past few quarters, suggests that additional gains may be difficult to achieve.

The stock recently breached analysts' average price targets for the first time since May, suggesting that even Wall Street firms, more than 90% of which recommend buying the stock, don't expect further upside. The rise also lifted Nvidia's 14-day Relative Strength Index to 80.7, above the 70 level that signals to some technical analysts that the stock is overbought.

However, bulls can easily point to fundamentals to justify the advance, including a bullish outlook from Arm Holdings Plc, which rose a record 48% on Thursday. The chip designer's CEO singled out AI as a long-term driver, saying it “is not in any way, shape or form a hype cycle.”

Several recent Nvidia reports have supported this view by increasing previous expectations. Revenue is expected to rise about 120% during fiscal year 2024, with another 60% growth expected next year. The centrality of processing chips to AI, coupled with Nvidia's perceived technical superiority, has convinced many that its growth is permanent and long-term in nature.

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Gus Zinn, senior portfolio manager at Macquarie Asset Management, is among those who believe Nvidia's rally has more room to run, and stressed that even with the progress, valuation is still far from recent peaks.

“A lot of companies are talking about AI, but none of them have seen revenue growth or a change in estimates like Nvidia, and the stock is actually keeping pace with rising expectations,” he said. “Valuation is not the hurdle — the hurdle is, how long is this going to last? Obviously it's not going to grow this fast forever, but I think it's going to last longer than people think, and it's going to be bigger than people realize.”

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Dividends are due Friday

No big profits are expected

– With the help of Subrat Patnaik.

(Updates for open market.)

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