In case you haven't noticed, the bulls have been in full control on Wall Street for more than two years. In 2024, the iconic Dow Jones Industrial Average, broad-based S&P 500, and innovation-powered Nasdaq Composite respectively rose by 13%, 23%, and 29%, and achieved multiple record-closing highs.
While there's no singular catalyst behind this outperformance, the rise of artificial intelligence (AI) has, arguably, played the biggest role in sending Wall Street's major indexes to all-time highs. With AI, software and systems have the ability to become more proficient at their tasks over time and can learn new skills without human intervention. This capacity to learn and evolve over time gives AI seemingly limitless long-term potential.
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Though no shortage of stocks has benefited from the AI revolution, none is the face of this movement more than semiconductor colossus Nvidia (NVDA -6.22%). Since the start of 2023, Nvidia's market cap has increased by $3.3 trillion (roughly a 10X rise) -- and its outperformance hasn't been lost on Wall Street or its analysts.
As of the closing bell on Jan. 6, more than five dozen analysts had weighed in on Nvidia stock, with 60 out of the 64 considering it the equivalent of a "strong buy" or "buy." The remaining four view Nvidia shares as the equivalent of a "hold," with not a single "underperform" or "sell" rating.
It begs the question: Is Wall Street overly optimistic and overlooking tangible concerns with this AI colossus?
Wall Street's most skeptical analyst foresees Nvidia stock losing 10% in 2025
Among the analysts and financial institutions that have issued a price target for Nvidia stock, the near-universal opinion is that it's headed higher. The average of these price targets comes out to more than $172 per share, with Rosenblatt's Hans Mosesmann claiming the Street's most-aggressive price target of $220 per share. If Mosesmann's price target proves accurate, Nvidia would near a $5.4 trillion valuation.
On the opposite end of the spectrum is D.A. Davidson analyst Gil Luria, who has a neutral (hold-equivalent) rating on Nvidia and a $135 price target. Until Nov. 21, Luria and his firm had a $90 price target on Nvidia, but substantially raised it (while keeping the neutral rating) following the company's fiscal 2025 third-quarter operating results.
Based on Nvidia's closing price on Jan. 6, Luria's price target would represent a roughly 10% decline in the new year. This makes Luria, by default, Nvidia's biggest skeptic on Wall Street.
In an interview with CNBC's Squawk on the Street earlier this week, Luria laid out his thesis for remaining cautious on Nvidia. In particular, he pointed to the importance of AI use cases expanding. While noting that companies like Meta Platforms (META -1.95%) are seeing demonstrable benefits in terms of ad sales by deploying AI solutions, Luria intimated that real-world instances of AI generating positive returns on investment for businesses are limited. If the application of AI fails to evolve in the new year, it may spell trouble for Nvidia.
Additionally, Luria referenced comments made by Microsoft (MSFT -1.28%) CEO Satya Nadella in a recent podcast where Nadella pointed to his company no longer being (AI) chip-constrained. In Luria's view, this suggests Microsoft, which is Nvidia's largest customer, may reassess its AI capital spending and slow it down a bit once its fiscal year ends on June 30.
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A perfect storm may be brewing for Nvidia in the new year
However, Luria's skepticism may be just the tip of the iceberg for Wall Street's leading AI stock.
To add to his commentary about Microsoft potentially reexamining its capital spending on AI data-center hardware, many of Nvidia's top customers by net sales are developing AI-graphics processing units (GPUs) of their own. This includes Microsoft, Meta Platforms, Amazon, and Alphabet.
Though it's unlikely these in-house chips are going to outperform Nvidia's famed Hopper (H100) chip or successor Blackwell GPU architecture, they will be considerably cheaper than Nvidia's hardware and more readily available. In other words, the production of these internally developed chips will reduce the AI-GPU scarcity that's fueled Nvidia's otherworldly pricing power and juicy gross margin.
In addition to a ramp up in internal competition, external competitors aren't sitting on their laurels. Advanced Micro Devices recently introduced its next-gen MI325X AI-GPU and is increasing production of its AI chip lineup. Broadcom CEO Hock Tan also anticipates demand for custom AI chips from its top hyperscale customers will meaningfully boost its artificial intelligence sales in the coming years. This all points to Nvidia's pricing power and gross margin weakening throughout the current calendar year.
There are political uncertainties to consider, as well. In 2022 and 2023, the Biden administration clamped down on exports of high-powered AI chips and AI-related equipment to China. Meanwhile, President-elect Donald Trump has outlined plans to implement a 35% tariff on imports from China once he takes office on Jan. 20, 2025. Regulatory uncertainty threatens billions of dollars of quarterly sales that Nvidia receives from China.
But perhaps the biggest concern of all is that history is undefeated when it comes to the evolution of game-changing technologies and innovations over the last three decades. Including the advent of the internet and its proliferation in the mid-1990s, there hasn't been a next-big-thing trend that's avoided a bubble-bursting event early in its expansion.
The telltale sign that investors have, once again, overestimated the early stage adoption and/or utility of AI is precisely what Gil Luria referenced in his CNBC interview: a lack of clearly defined plans from businesses to generate a positive return on their AI investments. Without a significant expansion of real-world use cases that generate a positive return on investment, the door will be wide open for Nvidia to come up shy of investors' lofty expectations in 2025.
