A Bullish Lesson for Nvidia From Apple Despite a Dip in Its Stock Price

Nvidia Corp. has experienced significant growth in market capitalization over the past year, but its rapid rise is now causing some hesitation in the market.

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Recently, Nvidia (NVDA, -2.02%) briefly held the title of the most valuable U.S. company by market cap, surpassing Microsoft Corp. (MSFT, 0.50%). However, Nvidia relinquished this position back to Microsoft on Thursday, and its shares are now poised for a second consecutive session of losses as the previously strong momentum begins to wane.

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Melius Research analyst Ben Reitzes, despite this market hesitation, reiterated his positive outlook on Nvidia in a Friday morning note. He aimed to provide perspective on the company’s dramatic increase in market cap: “Just because market value is transferring quickly, doesn’t make it wrong.”

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Reitzes compared Nvidia's situation to that of Apple Inc. (AAPL, 0.57%). He noted that occasionally, a single company can create a robust ecosystem that benefits developers and allows it to generate a disproportionately large share of profits. He explained, “It doesn’t matter if the ecosystem is somewhat ‘closed,’ as long as it is turnkey, reliable, easily updatable, and caters to creativity.”

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Companies that consistently maintain high margins can leverage the innovation of developers using their platforms and can quickly expand into related markets. For Nvidia, this potential lies in software. Reitzes pointed out that investors are starting to recognize that Nvidia could become a major player in powering "AI Factories" that produce software applications. He elaborated, “The concept that AI is still in the early innings of eating software is arguably transferring TAM to Nvidia.”

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Reitzes highlighted that Nvidia’s efforts in software could significantly impact the enterprise application software market, which he estimates to be worth about $500 billion.

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One of Nvidia’s promising ventures is its Inference Microservices (NIMs). According to Reitzes, NIMs “make it easy for enterprises to access AI with industry-specific bots that tackle certain real-world applications for business.” He explained that in simpler terms, NIMs mean, “We did the AI work for you,” facilitating accelerated development and AI adoption. Reitzes raised his price target for Nvidia shares from $125 to $160 and maintained his buy rating.

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Despite this optimistic outlook, Nvidia shares dropped 2.4% in Friday morning trading following a 3.5% decline on Thursday.

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In summary, while Nvidia's market capitalization surge has led to some market caution, analysts like Reitzes remain bullish on the company's long-term potential, especially given its strategic moves in AI and software. Reitzes believes Nvidia’s strong ecosystem and innovative capabilities position it well for continued growth, even as its stock experiences short-term fluctuations.

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