No one can predict what the stock market, or any individual stock, will do in 2024. The stock market surged in 2023, which probably wasn’t on many investors’ bingo cards in January. But one thing investors can do is avoid investments where the odds are stacked against them. Paying too high a price for even the best company can lead to poor results.
Two stocks that look way too expensive by 2024 are Nvidia (NASDAQ:NVDA) And Apple (NASDAQ:AAPL).
Nvidia is the leader in artificial intelligence. GPUs in the company’s data centers are selling faster than they can be manufactured. Advanced training major language models, like those that power ChatGPT, require incredible computing power. Nvidia’s proprietary CUDA compute platform has been around since 2007 and combines with its world-class hardware to create a competitive advantage that has been difficult to overcome until now.
Even though Nvidia seems untouchable, its days of absolute dominance won’t last. If estimates of the size of the AI accelerator market are anywhere near accurate, the tech industry will be incentivized to ensure there are options beyond Nvidia. AMD awaits the AI chip market This sum is expected to increase almost tenfold by 2027 to reach $400 billion. It is almost certain that Nvidia’s market share will decline as alternatives increase and buyers of AI accelerators optimize the total cost of ownership.
Nvidia’s growth has been incredible in 2023 and its profits have climbed even faster than its revenues. The company’s profit margins are the highest they’ve ever been. But the shortage of AI chips won’t last forever, as competitors race to bring alternatives to market, much like the gold rush mentality surrounding AI. Nvidia’s software advantage will be reduced to zero, although this process may take some time.
Nvidia is valued at around $1.22 trillion. That’s about 40 times the average earnings estimate by analysts. This valuation doesn’t seem unreasonable at first glance, but you have to be willing to assume that Nvidia’s incredible profit margins and growth rate will persist.
What if they don’t? What if companies spending big on training large language models found that turning those models into sustainable businesses was harder than expected? And if AMD’s competing chips, Intel, and others offer viable alternatives to Nvidia’s expensive products? Taking current growth rates and extrapolating over several years is a dangerous thing to do, especially in a very new market. ChatGPT, which started the AI frenzy, has only been around for about a year.
If there’s any sign that Nvidia is struggling in 2024, the stock still has a long way to go.
What is Apple’s growth story? After a sharp rise at the height of the pandemic, revenues have essentially stagnated in the post-pandemic period. Revenue fell 1% year over year in the fiscal fourth quarter, which ended September 30, and a ban on imports of the Apple Watch isn’t going to help matters.
The iPhone still accounts for more than half of Apple’s revenue, and it’s hard to imagine the smartphone market being a major source of growth for the company in the long term. Refresh cycles have gotten longer, and each year’s models offer minimal improvements. The iPhone is an incredible business for Apple, but it’s no longer a growth engine for the company.
The services sector generated $85 billion in revenue in fiscal 2023, but growth has been slow. Services revenue rose about 9%, not enough to offset falling sales of iPhones, Macs, iPads and wearables. Although earnings per share increased slightly over the year thanks to share buybacks, net income decreased slightly.
The big problem with Apple stock is its valuation. The company’s market capitalization now exceeds $3 trillion, putting the price-to-earnings ratio above 30. Given Apple’s anemic growth and the lack of a clear catalyst that could to accelerate growth, this valuation seems high. The company’s Vision Pro headset is its next big move, but a $3,499 price tag will be hard for customers to swallow.
Apple shares are up nearly 50% in 2023, but don’t expect a repeat in 2024.
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Timothy Green holds positions at Intel. The Motley Fool holds positions and recommends Advanced Micro Devices, Apple and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short February 2024 $47 calls on Intel. The Mad Motley has a disclosure policy.
2 overheated stocks that could fall in 2024 was originally published by The Motley Fool