Nvidia (NASDAQ:NVDA) has been one of the standout stocks of the past year. Up 521% since the start of 2023, investors have piled in as it’s become one of the world’s hottest growth shares.
Revenues are soaring thanks to white-hot demand for its graphics processing chips (GPUs) for AI applications. This hardware — which performs thousands of complicated actions at once — is critical for training and running deep learning models.
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All eyes will be on Nvidia’s first-quarter trading update on 22 May. Its most recent statement in February was another blockbuster event: it showed sales up an incredible 265% in 2023 thanks to robust AI chip sales.
Overblown?
February’s update was the latest in a string of forecast-beating trading updates. In 2023 the chip-maker reported turnover of $22.1bn, topping broker expectations by an impressive $1.5bn.
The market (and in particular retail investors) have now come to expect such blowout results. And so Nvidia shares now command such a high valuation. Today they trade on a price-to-earnings (P/E) ratio of 37.1 times.
The problem is that such a hefty figure leaves the company in danger of a price correction if market news cools even a fraction. And in the case of Nvidia, there are multiple threats that could pull it back down to earth with a bang.
These include, but are not exclusive to:
- Cooling tech sector growth.
- Rising competition from Huawei and other chip-makers.
- Changes to government AI regulations.
- Worsening trade relations between the US and China.
A better AI stock
No share investment is without risk. But considering Nvidia’s high valuation, I think these dangers make its shares largely unattractive right now.
But this doesn’t bother me. After all, there are plenty of other growth shares I can buy to capitalise on this new tech revolution.
Copper miner Central Asia Metals (LSE:CAML) is one. It may not be an obvious candidate as an AI stock. But copper demand for the red metal is poised to soar as chip-making takes off, which in turn could help profits here shoot through the roof.
Analysts at Trafigura think demand from data centres and for other AI-related applications will reach 1m tonnes a year by 2030.
In truth, artificial intelligence is only one factor that is tipped to supercharge copper demand. Bustling activity in the renewable energy, electric vehicle, construction and consumer electronics sectors is also set to push metal consumption skywards.
These multiple drivers also help to reduce risk. Central Asia Metals could deliver stunning earnings growth even if AI growth rates disappoint.
A bargain growth stock
Mining is a hazardous process and profits-sapping setbacks can be common. Project costs can unexpectedly surge, while revenues may also slip due to declining ore grades and production stoppages.
But Central Asia Metals’ low valuation could help to limit any share price downside such issues cause. City analysts think earnings at the Kazakh miner will rise 35% in 2024. This leaves it trading on a forward P/E ratio of just 9.6 times.
