Artificial intelligence (AI) stocks are suddenly seeing red. The segment plunged last week after a pair of earnings-driven declines from ASML and Taiwan Semiconductor, two leaders in semiconductor manufacturing, sparked a broader sell-off.
On Friday, one analyst questioned Super Micro Computer's (NASDAQ: SMCI) decision not to release preliminary revenue results, even though it had become a custom, and that led to a bloodbath. Supermicro stock finished the session down 23%, Arm Holdings lost 17%, and Nvidia(NASDAQ: NVDA) finished the day down 10%.
Is the AI bubble bursting, or is this just a temporary sell-off? No one knows the answer to that question, but a pair of Wall Street analysts think two top AI stocks, Nvidia and Supermicro, are both headed lower. Keep reading to see why.
Image source: Getty Images.
1. Nvidia: 19% downside
Nvidia has been the undisputed leader in the AI boom. While OpenAI's launch of ChatGPT kicked off the generative AI race, Nvidia has raked in the bulk of the industry profits thus far, as sales of its graphics processing units (GPUs) and related components form the backbone of the infrastructure that makes AI apps, like ChatGPT, work.
Nvidia's revenue has tripled in recent quarters, driven by soaring AI demand, and its profits have grown even more rapidly. However, one analyst thinks that Nvidia could have further to fall after Friday's sell-off.
DA Davidson's Gil Luria weighed in on Nvidia stock after the company's February earnings report with a neutral rating and a price target of $620. This implied a decline of 21% at the time, or 19% from Friday's close.
Luria acknowledged that Nvidia delivered strong results and is in a position to continue dominating the AI compute space, but he also expects the company's competitors to catch up. The analyst sees a chance that Nvidia's demand will decline in the next four to six quarters.
Competition is indeed coming for Nvidia, as AMD and Intel have both launched competing AI GPUs. However, it's still too early to tell if they'll take significant market share from Nvidia.
Nvidia's growth rate is certain to slow in the coming quarters as it will face more difficult comparisons, but the Wall Street consensus calls for strong growth to continue. If revenue were to decline as Luria seems to imply, at least in some categories, the stock would almost certainly plunge.
2. Supermicro: 65% downside
Like Nvidia, Supermicro has been a big winner from the AI boom. The maker of high-density servers, which work especially well for running AI applications, has skyrocketed since the beginning of 2023. Its revenue is also soaring, up more than 100% in its most recent quarter.
However, not every analyst is sold on Supermicro's potential. Susquehanna rated the stock a sell, with a price target of just $250 after the company's earnings report at the end of January. This implies a 65% decline in the stock from its current price.
The research firm acknowledged the secular growth in AI compute but saw a number of problems with the company's results. For example, despite soaring revenue growth, Supermicro's gross margin declined, which Susquehanna sees as a lack of leverage in its business model. It also noted a demanding working capital requirement, which may have led to the company's decision to raise $2 billion in March. Susquehanna also questioned the overall quality of the company's earnings.
The Friday sell-off in Supermicro shares could portend greater problems for the company if its third-quarter earnings report disappoints. Investors are expecting another surge in revenue when it reports earnings on April 30.
It would be a surprise for the company to miss its own guidance from late January, as there are still high expectations baked into the stock. Regardless of the numbers, investors should expect the volatility in Supermicro's stock to continue.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
