This week, Nvidia (NVDA.O) briefly became the largest company in the U.S. stock market by market value, with its share price rising by more than 1,000% since October 2022. Its share price has risen by 206% in the past 12 months.

Nvidia bulls think bigger gains are yet to come. As the dominant supplier of chips that power artificial intelligence applications, the company is at the forefront of a massive technology shift and expects revenue to double to $120 billion this fiscal year and to $160 billion the year after. By comparison, Microsoft Corp's (MSFT.O) revenue is expected to grow about 16% this fiscal year.

Nvidia's stock's stunning performance has attracted investors who are afraid of missing out on more gains (FOMO). This has also made Nvidia's stock more valuable, with its forward price-to-earnings ratio increasing 80% this year. This may make the company's stock more vulnerable to a sharp pullback when it encounters bad news.

“Its past performance shouldn’t factor into your investment decision today,” said Chuck Carlson, CEO of Horizon Investment Services. “But in a stock like Nvidia, it’s hard not to let that factor into your investment decision because it gives you a sense of chasing the stock price.”

So far, Nvidia's stock price has rewarded bulls and punished skeptics. The stock has risen 164% so far in 2024, and its market value has soared to more than $3.2 trillion, briefly surpassing Microsoft and Apple (AAPL.O) this week.

Optimistic investors point to Nvidia's dominance in the field of AI chips as a key reason for their optimism. The high performance of Nvidia's chips makes it difficult to replace in AI data centers. In addition, its proprietary software framework is a tool used by developers to program AI processors, which consolidates Nvidia's leading position.

Ivana Delevska, founder and chief investment officer of Spear Invest, remains bullish on Nvidia, the top holding of the Spear Alpha ETF at nearly 14%, as she expects its earnings to beat Wall Street analysts’ forecasts.

“If the stock price was going up like this and earnings weren’t really moving, we’d be very concerned,” Delevska said. But, “right now, it’s looking pretty solidly supported by earnings.”

In fact, even after growing from 25 at the start of the year, Nvidia now trades at a forward price-to-earnings ratio of about 45, just above its five-year average of 41, according to LSEG Datastream. At the same time, that valuation is down from 84 a year ago.

Tom Plumb, president of Plumb Funds, said he believes the opportunity for Nvidia chips outside of AI is underappreciated. The firm has held Nvidia shares for more than seven years and they are the largest holding of two of its funds. "I'm talking about data and access to data," Plumb said. "They have the fastest, smartest chips."

Others, however, are cautious about Nvidia's prospects for stunning gains in the future.

Gil Luria, an analyst at D.A. Davidson, said Nvidia has "truly revolutionary" products and is delivering "unprecedented growth." However, he has a "neutral" rating on the stock with a $90 price target, compared to Thursday's close of $130.78.

Looking ahead to the next few years, Luria said he doubts Nvidia’s customers will be able to spend enough to drive up Wall Street earnings expectations that underpin the company’s valuation. “The caution about Nvidia comes from the long-term outlook. This performance is hard to sustain,” Luria said.

Billionaire investor Stanley Druckenmiller said last month that he was reducing his massive bet on Nvidia in 2024, saying, “AI may be a little overvalued now, but undervalued in the long run.”

Carlson of Horizon Investment Services has a "buy" rating on Nvidia, but says it won't be included in Horizon's portfolio of about 30 stocks because of its relatively expensive valuation.

Other concerns include the potential erosion of Nvidia's market leadership by competition as tech giants Microsoft Corp, Meta Platforms Inc META.O and Alphabet Inc's Google GOOG.O race to build AI computing power and incorporate their technology into products and services.

Analysts at Morningstar, who have a $105 price target, said leading suppliers like Amazon.com Inc AMZN.O, Microsoft Corp and Meta Platforms Inc would eventually seek to reduce their reliance on Nvidia and diversify their suppliers.

Morningstar analyst Brian Colello wrote this month: "Nvidia dominates the AI ​​field today, and if it can maintain this leadership position over the next decade, the company's profitability will be unlimited. However, any signs of success in the development of alternatives are Could significantly limit Nvidia's upside."

The article is forwarded from: Jinshi Data