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Why Nvidia's 'gravy train' could come to 'screeching halt' after a volatile trading week

Nvidia's (NVDA) stock went on a wild ride this week as shares reversed direction from all-time highs and Wall Street continued to debate how much more the chip giant can add to its record-setting rally.

"The stock's steep climb makes it vulnerable to profit taking, but we argue any volatility [is] likely to be short-lived," Bank of America wrote on Thursday. The bank reiterated its Buy rating and $150 price target, calling Nvidia a "top pick."

The chipmaker, which briefly dethroned Microsoft (MSFT) as the world's most valuable company on Tuesday, saw its market cap edge lower on Friday to sit at around $3.12 trillion, below Microsoft's $3.33 trillion.

Patrick Moorhead, Moor Insights & Strategy founder and CEO, told Yahoo Finance on Friday that investors should be watchful for signs of a pullback.

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While he said he doesn't see the status quo of Nvidia's dominance changing over the next six to nine months, investors should focus on "the downstream profitability that people in the ecosystem are making or not making."

"These are the software companies like Adobe, Salesforce, SAP, and ServiceNow. Because if those enterprises and those consumers aren't paying more for these new AI features, then this whole gravy train comes to a screeching halt, like we saw in the internet bust," he explained.

Increased competition could also serve as a headwind to pricing power, Moorhead warned, as Nvidia competes with not only "merchant silicon providers" like AMD (AMD) and Intel (INTC) but also "homegrown ones" from Amazon's AWS (AMZN), Microsoft's Azure (MSFT), and Google (GOOG, GOOGL).

President and CEO of Nvidia Corporation Jensen Huang delivers a speech during the Computex 2024 exhibition in Taipei, Taiwan, Sunday, June 2, 2024. (AP Photo/Chiang Ying-ying)
President and CEO of Nvidia Corporation Jensen Huang delivers a speech during the Computex 2024 exhibition in Taipei, Taiwan, Sunday, June 2, 2024. (AP Photo/Chiang Ying-ying) (ASSOCIATED PRESS)

The flurry of AI investment has continued to boost optimism over Nvidia's growth rate. In its latest quarterly report, the company reported adjusted earnings that surged 461% year over year while revenue grew by 262%.

In addition to stellar earnings, Nvidia also completed a 10-for-1 split on June 10 and doubled its quarterly cash dividend — a move that's been echoed by other tech giants in recent quarters.

Shares of Nvidia are up about 200% over the last 12 months and more than 3,200% over the last five years. Year to date, Nvidia has gained around 160%.

But despite its sky-high valuation, the case for $4 trillion has been building.

"I don't see any reason it couldn't get up to $4 trillion," Moorhead said. "A lot of this is based on expectations because you look at the price-to-earnings ratio, it's pretty astronomical. And if we can see some positive signs from the downstream players ... [I] don't see any reason why this couldn't get to $4 trillion."

Wedbush analyst Dan Ives agreed, writing in a note to clients on Thursday, "We believe over the next year the race to $4 trillion market cap in tech will be front and center between Nvidia, Apple, and Microsoft."

Ives said the AI revolution is a party that is "just getting started," driven by the pace of data center spending by tech giants. He expects incremental AI spend to hit $1 trillion over the next decade with over 70% of enterprises ultimately heading down the AI use case path.

"Its 9pm in a party going till 4am with the rest of the tech world now joining," he said.

Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.

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