Is Nvidia stock still a buy?
This is the question on many investors’ minds.
NVDA stock tripled in the first half of 2024, but has dropped 24% since:
I believe this pullback is a buy-the-dip opportunity. Here are 3 reasons why…
#1 Investors are wrong to worry about Nvidia’s earnings results …
It was another monster quarter for Nvidia (NVDA)…
Here’s a quick rundown:
Total revenue increased 122% from the same quarter last year to $30 billion.Data center revenue — an approximation of artificial intelligence (AI) revenue — jumped 154% to $26.3 billion.Earnings grew 168% to $16.6 billion, or $0.67 per share.
Despite reporting record quarterly results that beat Wall Street’s estimates, Nvidia’s stock sold off. Investors are concerned about: 1) the durability of big tech’s spending on Nvidia’s products; 2) Blackwell (Nvidia’s next-gen AI chip) production delays; and 3) gross margin compression.
I don’t see those issues being as bad as some say they are.
First of all, big tech companies showed no signs of slowing their rate of spending on Nvidia’s products anytime soon. In fact, they’ve all flat out said they plan to continue or accelerate their rate of AI investments in the coming quarters. I’ll explain more about this in a moment.
Concerns surrounding Blackwell production delays are similarly misplaced in our view. A three-month delay in rolling out tech like this — which is insanely difficult to design and manufacture — means absolutely nothing. Also, after listening to Nvidia CEO Jensen Huang’s most recent comments about Blackwell, it’s hard to see any real delay at all. Huang said the company’s started volume production of Blackwell and that it will start shipping in the fourth quarter, which was always the expected launch time frame.
Regarding the margin compression concern, Nvidia’s gross profit margin fell from 78.4% two quarters ago to 75.2% last quarter. But this is also a non-issue. It’s hard to state how impressive a mid-70% gross margin is in the fabless semiconductor space. Other than Nvidia, the world’s three largest fabless semiconductor companies are Qualcomm (QCOM), Advanced Micro Devices (AMD), and Broadcom (AVGO). These three companies, all of which are very profitable, operate with gross profit margins ranging from 48% to 65%. Nowhere near Nvidia’s gross margin.
Long story short, Nvidia continues to fire on all cylinders.
#2 AI spending is showing no signs of slowing down…
Investors are afraid big tech will slow down spending on Nvidia’s AI chips. When in fact, spending is accelerating…
Microsoft (MSFT), Alphabet (GOOG), Amazon (AMZN), and Meta Platforms (MAETA) — the so called hyperscalers — are all ramping up their AI investments:
Collectively, hyperscalers spent $52 billion in 2Q of 2024 on AI, up +54% from just a year ago. And those are just four companies…
Elon Musk’s AI startup xAI just built a cluster of 100,000 Nvidia H100 AI chips, tripling the previous record.
Bottom line: While the spending spree on Nvidia’s products will slow eventually, it’s not going to happen anytime soon.
#3 Nvidia trades at a reasonable valuation…
Most investors think Nvidia is way overvalued. But that’s hardly the case…
Yes, it’s trading at 31.5X forward earnings, which is certainly not cheap.
But realize that Nvidia is trading on the cheaper side of its forward-earnings valuation in the last 3 years:
Source: Koyfin
Because although its stock price has surged, its expected profits have surged even faster.
Nvidia’s trades at a cheaper valuation than its closest competitors — AMD (AMD) and Intel (INTC) — even though it’s running a far superior business:
Source: Koyfin
Conclusion: Nvidia stock looks attractive both from the fundamental and valuation perspective. Buy the dip on NVDA.
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3 reasons why Nvidia stock is still a buy despite dropping 24% was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.