In each of the past four years, Wall Street has traded off bear and bull markets. These swings have been particularly noteworthy for the predominantly growth-focused Nasdaq-100, which comprises 100 of the largest nonfinancial companies listed on the Nasdaq stock exchange.
After tumbling 33% during the 2022 bear market, the innovation-powered Nasdaq-100 rallied by a jaw-dropping 54% in 2023. Such outperformance isn’t lost on Wall Street’s most experienced investors.
Although Wall Street’s consensus price targets often point to additional upside for industry-leading businesses, three Wall Street analysts are forecasting upside of up to 127% in 2024 for three Nasdaq-100 components.
Nvidia: Implied upside of 79%
The first Nasdaq-100 stock with jaw-dropping upside potential in the new year just happens to be the top megacap stock from 2023. I’m talking about semiconductor stock Nvidia (NVDA). Analyst Hans Mosesmann of Rosenblatt Securities has attached a lofty $1,100 price target to shares of Nvidia, which, at its closing price of around $616 per share on Jan. 25, implies additional upside of 79%. It would also add about $1.2 trillion to Nvidia’s current market cap of $1.52 trillion.
It’s no secret that the buzz surrounding Nvidia involves artificial intelligence (AI). Nvidia’s A100 and H100 graphics processing units (GPUs) have become the infrastructure backbone of AI-accelerated data centers. Although estimates vary, it’s not out of the question that Nvidia will account for 90% or more of the share of GPUs being deployed in these high-compute data centers this year.
In addition to being the premier choice for businesses looking to lean on AI as a growth tool, Nvidia should see its production rapidly ramp up in 2024. Taiwan Semiconductor Manufacturing is meaningfully increasing its chip-of-wafer-on-substrate capacity, which will allow Nvidia to deliver more A100 and H100 chips this year. Thanks to its data center segment, Nvidia’s total sales are expected to catapult from a reported $27 billion in fiscal 2023 to an estimated $93.4 billion by fiscal 2025.
Ironically, though, Nvidia’s biggest headwind in the new year might be itself. In its current fiscal year, which ends in late January 2024, A100 and H100 GPU scarcity have fueled exceptional pricing power. But as its own production increases, the company’s gross margin could taper.
To add to the above, Nvidia won’t be the only major fish in the pond in the current calendar year. Advanced Micro Devices introduced its MI300X GPU last year and plans to begin a full-scale rollout in 2024. Meanwhile, Intel intends to bring its Falcon Shores GPU to market next year as a direct competitor to Nvidia. Though Nvidia doesn’t seem to be in danger of losing its No. 1 share ranking in AI-accelerated data centers, its market share may be plateauing.
Investors should also consider U.S. regulators’ actions that could curb Nvidia’s sales to China, the world’s No. 2 economy by gross domestic product. Regulators have restricted exports of AI chips on two separate occasions, which could result in billions of dollars in lost revenue each quarter for Nvidia.
Despite undeniable momentum, I don’t see how Mosesmann’s pie-in-the-sky price target will become a reality in 2024.
Warner Bros. Discovery: Implied upside of 127%
A second Nasdaq-100 stock offering scorching-hot upside in the current year is media company Warner Bros. Discovery (WBD). Analyst Matthew Harrigan of Benchmark set a price target of $24 on the company in December, which suggests 127% upside to come.
As I noted last week, the top catalyst for Warner Bros. Discovery in 2024 is an expected bounce-back in advertising. Legacy media companies still rely on advertising for a meaningful percentage of their revenue. Uncertainties regarding U.S. growth coerced most businesses to pare back their ad budgets in 2022 and 2023.
The ad driver in 2024 is the U.S. election cycle. Media investment company GroupM anticipates that U.S. political spending will jump 31% in 2024 to $15.9 billion compared to the election cycle in 2020. That’s generally good news for legacy media companies.
But if Warner Bros. Discovery has any shot of catapulting higher by a triple-digit percentage in the new year, it will be because of operating improvements in its streaming segment. The clear tailwind for the company is that it possesses strong pricing power. Warner Bros. Discovery has raised prices on its subscribers with minimal losses to its paying members. Combined with purposeful cost-cutting, there’s a genuine path to recurring profits for the company’s direct-to-consumer segment within the next two years.
On the other hand, Warner Bros. Discovery is fighting an uphill battle against its own balance sheet. Including debt expected to be paid within the next year, the company is dealing with approximately $42.4 billion in net debt. It’s not an envious position to be in, with interest rates rising at their fastest clip in four decades. It also limits Warner Bros. Discovery’s ability to make deals and innovate.
While Harrigan’s price target isn’t out of the question for Warner Bros. Discovery in 2024 — shares of the company traded at this level less than two years ago — it’s not uncommon for media turnarounds to be drawn out. Though the foundation for a turnaround is there, look for Wall Street and investors to take something of a “prove-it” approach with the company and its stock in the new year.
Tesla: Implied upside of 89%
The third Nasdaq-100 stock with significant upside in 2024 is none other than the largest auto company by market cap, Tesla (TSLA). Analyst Adam Jonas of Morgan Stanley recently lowered his and his firm’s price target on North America’s leading automaker to $345, implying an up to 89% increase is expected in 2024.
The lure of Tesla has long been its first-mover advantage. Prior to the start of 2023, it had introduced four mass-production models (3, S, X, and Y), with the Cybertruck becoming the fifth. After hitting its production target of at least 1.8 million electric vehicles (EVs) last year, Tesla has the capacity to potentially surpass 2 million EVs produced in the current year.
Jonas and Tesla enthusiasts are also fans of the company’s recurring profits. Whereas Tesla has delivered four consecutive quarters of generally accepted accounting principles (GAAP) profit, no other pure-play EV producer is within a stone’s throw of reaching recurring profitability. It demonstrates just how important the company’s first-mover advantages have been.
It’s also worth adding that Tesla closed out 2023 with a little over $29 billion in cash, cash equivalents, and investments. It has more than enough capital to sustain an aggressive production ramp.
Despite Jonas’s resounding optimism, there are quite a few reasons to believe that $345 is a pipe dream for Tesla in the new year.
To begin with, the company’s price war with other EV manufacturers is clobbering its operating margin. During Tesla’s May annual shareholder meeting, CEO Elon Musk pointed out that his company’s pricing strategy is dictated by demand. More than a half-dozen price cuts for all production models (not including the Cybertruck) since the start of 2023 signals weaker EV demand and rising inventory levels.
Another problem for Tesla is that a substantial percentage of its pre-tax income is derived from unsustained sources. During the fourth quarter (Q4), Tesla brought in $433 million in regulatory tax credits and another $333 million from interest income earned on its cash. Approximately 35% of its $2.19 billion in Q4 pre-tax income came from non-innovative channels, which isn’t what you’d expect to see from a supposed growth stock.
However, the biggest issue with Tesla, at least in my opinion, remains its CEO. Despite successfully introducing some new innovations, Musk has a long history of delaying key projects and/or punting promised innovations. The company’s valuation has many of these currently unfulfilled promises built in, and they could very easily be backed out in 2024.
— Sean Williams
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Source: The Motley Fool