Apple offers a bullish lesson for Nvidia, even as the chip stock dips

By Emily Bary

'Just because market value is transferring quickly, doesn't make it wrong,' an analyst says

Nvidia Corp. has been gobbling up market capitalization over the past year or so, and its fast ascent now seems to be giving the market a bit of pause.

Though Nvidia (NVDA) spent a day as the most valuable U.S. company by market cap, it gave that title back to Microsoft Corp. (MSFT) on Thursday. Now the shares are heading toward a second consecutive session of losses as the momentum trade stalls out.

Read: Nvidia's stock turns sharply lower with a $246 billion swing in market cap

But Melius Research analyst Ben Reitzes reiterated his bullish view of the stock in a Friday morning note, and he sought to put the company's market-cap bonanza into perspective: "Just because market value is transferring quickly, doesn't make it wrong."

He gave the example of Apple Inc. (AAPL) "Occasionally, like we saw with Apple and the iPhone, one company (or a very select few), create an ecosystem that is good for developers, allowing it to generate an outsized share of profits," Reitzes wrote. "It doesn't matter if the ecosystem is somewhat 'closed,' as long as it is turnkey, reliable, easily updatable and caters to creativity."

Companies with the proven ability to maintain high margins can leverage the innovation of developers who use their platforms, Reitzes said, and they can also move more swiftly into related total addressable markets.

See more: Nvidia is one of the 'three horsemen of AI.' Here are the others.

In Nvidia's case, that's software. "Now investors are beginning to realize that if successful, Nvidia will be powering 'AI Factories' that create software applications," he wrote. "The concept that AI is still in the early innings of eating software is arguably transferring TAM to Nvidia."

The company's efforts in software put it on course to eat into the market for enterprise application software that he pegs to be worth about $500 billion.

Reitzes is encouraged by Nvidia's Inference Microservices, better known as NIMs, which "make it easy for enterprises to access AI with industry-specific bots that tackle certain real-world applications for business," according to his assessment.

"In plain English, NIMs means - 'We did the AI work for you' - enabling accelerated development and AI adoption," he added, as he boosted his price target on Nvidia shares to $160 from $125 and maintained a buy rating.

Still, Nvidia shares are down 2.4% in Friday morning trading after staging a 3.5% decline in Thursday's session.

Don't miss: Bearish Nvidia option bets spike as stock sees record-breaking reversal

-Emily Bary

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06-21-24 0942ET

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