Since the page turned to 2023 a little over 16 months ago, the bulls have been running wild on Wall Street. Professional and everyday investors have flocked to high-growth, innovation-driven businesses, and have been particularly enamored with Wall Street's next-big-thing investment trend: artificial intelligence (AI).
With AI and machine learning, software and systems are given the ability to learn over time without human intervention. Being able to evolve and become more proficient at assigned tasks gives AI wide-ranging utility and multitrillion-dollar long-term potential. It's precisely why investors have piled into semiconductor stock Nvidia (NVDA +1.00%) and sent its market cap higher by nearly $1.9 trillion since 2023 began.
Image source: Getty Images.
Nvidia's upside may be limited as headwinds build
A quick review of Nvidia's headline growth figures demonstrates why investors can't seem to get enough of this stock.
In fiscal 2024, which came to a close on January 28, Nvidia reported total sales growth of 126%, with Data Center revenue climbing by a scorching-hot 217%. Nvidia's A100 and H100 graphics processing units (GPUs) have become staples in AI-accelerated data centers, and are the go-to for businesses aiming to train large language models and run generative AI solutions on their cloud-based platforms.
NASDAQ: NVDA
Key Data Points
But even with things going swimmingly for Nvidia, the high-water price target among Wall Street analysts is $1,400 from Hans Mosesmann at Rosenblatt. This implies Nvidia's peak upside over the next year is 58%, based on where the company's shares ended on May 3.
Despite this lofty price target, it's possible the infrastructure backbone of the AI movement is firmly in a bubble. Every next-big-thing investment trend over the last 30 years has endured a bubble during its early stages of expansion, and AI is unlikely to be the exception to this unwritten rule.
Furthermore, Nvidia has competition coming at it from all angles. External competitors are bringing newly designed AI-GPUs to market to compete directly with Nvidia's H100 chip. Meanwhile, Nvidia's top four customers, which comprise around 40% of its net sales, are developing in-house AI-GPUs for their respective data centers. In other words, Nvidia's upside appears limited.
Instead of focusing on a potential bubble stock, select Wall Street analysts see upside ranging between 223% and 557% for the following three small-cap stocks.
NASDAQ: PLUG
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Plug Power: Implied upside of 557%
The first small-cap stock with truly jaw-dropping upside that could handily outpace Nvidia in the return column, at least based on the lofty price target of one Wall Street analyst, is hydrogen fuel-cell solutions company Plug Power (PLUG +3.21%).
According to analyst Amit Dayal of H.C. Wainwright, Plug Power stock can reach $18 per share. If accurate, this would represent upside of 557% compared to the $2.74 Plug shares closed at last week. Dayal believes the company's double-digit long-term growth projections, efforts to control its expenses, and incremental margin improvements, merit this aggressive price target.
On paper, Plug Power hasn't struggled to grow its sales. While its partnership with Amazon to supply some of its warehouses with hydrogen fuel-cell-powered GenDrive forklifts has helped Plug, the long-term buzz has to do with the green hydrogen infrastructure the company is developing to (pardon the pun) fuel cleaner transportation.
But just like Dayal's price target, these ambitions may be a bit too grand for a company that hasn't been able to keep its expenses under control. Though sales catapulted from $701 million to $891 million in 2023 from the previous year, its net loss more than doubled to about $508 million from around $194 million.
To make matters worse, Plug Power has been forced to sell shares of its common stock to raise capital as it burns cash. Even if the company secures a much-awaited $1.6 billion low-interest government loan from the U.S. Department of Energy, it doesn't provide an immediate remedy for the company's ongoing cash burn.
I'm no fan of Nvidia at a $2.2 trillion market cap. I might be even less of a fan of Plug Power approaching a $2 billion valuation.
Image source: Getty Images.
Petco Health and Wellness: Implied upside of 223%
A second small-cap stock with scorching-hot upside that could potentially run circles around Nvidia, based on the forecast of one Wall Street pundit, is pet-focused retail chain Petco Health and Wellness (WOOF +1.07%).
In a March note, analyst Anna Andreeva of Needham maintained her firms' buy rating on Petco and stood firm on her previously issued $5 price target. If Petco were to rally to this mark, shareholders as of May 3 would enjoy 223% upside!
The lure of investing in the pet industry is simple: owners will gladly open their wallets to keep their furry, feathered, gilled, and scaled "family members" healthy and happy. The American Pet Products Association reported in April that "total U.S. pet industry expenditures reached $147 billion in 2023," with aggregate spending on pets expected to grow annually through 2030. It's a recession-resistant industry that hasn't seen a collective sales downturn in more than a quarter of a century.
On paper, Petco Health and Wellness should be able to benefit from steady growth in U.S. pet ownership. Management has wisely been promoting higher-margin services, such as grooming, veterinary services, and pet insurance.
The major issue for Petco is that a portion of its outstanding debt sports variable rates. Since March 2022, the Federal Reserve has undertaken an aggressive rate-hiking cycle that's seen interest rates climb at their fastest pace in four decades. Put simply, Petco's operating cash flow is being gobbled up by debt-servicing expenses. That's less than ideal -- and its plummeting share price is indicative of this.
While I do believe Petco has the tools to right the ship, its liable to remain in the doghouse in the coming quarters.
NASDAQ: NVAX
Key Data Points
Novavax: Implied upside of 285%
The third small-cap stock with sensational upside potential, based on the prognostication of one Wall Street analyst, is biotech company Novavax (NVAX +1.43%).
Despite the Novavax stock chart looking like something straight out of a horror film, analyst Vernon Bernardino of H.C. Wainwright believes shares will hit $19. Given that Novavax ended the previous week at $4.93, Bernardino's aggressive price target implies a near-quadrupling over the next year.
The reason Novavax's stock chart looks so wild has to do with its promise and missed opportunity during the COVID-19 pandemic. It was one of a select few drug companies to successfully develop a COVID-19 vaccine. However, management delayed filing an emergency use authorization (EUA) application in the U.S., and the company struggled to increase vaccine production. Whereas Moderna and Pfizer/BioNTech raked in tens of billions of dollars in sales from proverbial low-hanging fruit with their respective COVID-19 vaccines, Novavax missed out on virtually all of it.
On the other hand, Novavax's vaccine is differentiated. Whereas the Moderna and Pfizer/BioNTech vaccines rely on messenger-RNA (mRNA) technology, the Novavax COVID-19 vaccine is protein-based and teaches the immune system how to recognize the virus and fight back. It provides an alternate treatment pathway for people who might be apprehensive of mRNA technology.
Further, Novavax is working on a combination COVID-19/influenza vaccine that could hit pharmacy shelves as soon as 2026, assuming accelerated approval by the U.S. Food and Drug Administration. This combo vaccine would almost certainly be a better revenue driver for the company than a seasonal COVID-19 vaccine.
Lastly, Novavax and global vaccine alliance Gavi reached a up to $400 million settlement in February that had been a major overhang for the company. Inclusive of significant cost-cutting efforts, Novavax has a genuine chance at becoming profitable on an operating basis by as early as next year.
Though Bernardino's price target is lofty, Novavax looks to have the intangibles needed to outperform Nvidia.
