Some investors believe that Nvidia (NASDAQ: NVDA) stock is closely tied to the artificial intelligence (AI) boom. As a leader in the AI chip market, Nvidia has become a favorite on Wall Street. Its prominence reflects the rapid advancements in AI technology, reminiscent of the internet’s revolutionary growth in the late 1990s.
Nvidia’s stock had a remarkable run for nearly two years; however, it recently took a 22% plunge from its peak in June 2024. The strategy of “buying the dip” has long been popular among investors, especially when it comes to successful companies like Nvidia that have catalyzed the AI landscape.
Yet, potential buyers should tread carefully and weigh the associated risks before diving in.
Nvidia offers attractive valuations, but there may be reasons behind this allure. The company’s AI-centric graphics processing units (GPUs) have become essential for tech giants striving to build extensive data centers to support powerful AI models. Approximately $26.3 billion of Nvidia’s total $30 billion revenue in Q2 stemmed from its data center sector, establishing Nvidia as a key player in the AI chip domain. The impressive growth of 154% year-over-year for this segment reveals a robust demand for their chips.
Currently, analysts predict Nvidia to generate earnings of $2.84 per share this fiscal year, increasing to $4 per share the following year. This positions Nvidia with a forward price-to-earnings ratio (P/E) of 26 based on next year’s estimates. If Nvidia manages to maintain a 40% annual growth rate—something analysts anticipate—it could indeed be a value play.
However, investors should also consider the volatility linked with such growth estimates. A small number of companies, notably four major players—Microsoft, Meta Platforms, Alphabet, and Amazon—account for 40% of Nvidia’s total revenue. These same tech giants are also investing in their custom AI chip development, casting shadows on Nvidia’s future sales reliability.
Nvidia has traditionally enjoyed high pricing power since the onset of the AI craze, but signs suggest that the market dynamics are shifting. Companies are beginning to scrutinize the costs associated with their AI initiatives, altering the conversation around pricing. Amazon’s recent earnings call pointed out that their AI clients are increasingly seeking better value. This trend of tightening budgets could indicate future pricing pressures for Nvidia, forcing the company to choose between competitive pricing or diminished profit margins.
Nvidia is currently forecasting gross margins in the mid-70s for this year, a significant standout but not sustainable long-term. As margins normally veer towards historical averages, any significant regression could be detrimental for current investors.
So, should potential investors jump into Nvidia stock at this moment? While these concerns are essential for evaluation, they shouldn’t preclude you from considering Nvidia as part of your portfolio. The impressive current financial performance warrants attention but remains susceptible to shifts in customer behavior and broader market conditions.
For those inclined to invest in Nvidia during this dip, a measured approach like dollar-cost averaging might serve well. This strategy can help mitigate anxiety during volatile market phases, allowing investors to seize opportunities as they arise gradually. Owning Nvidia could prove lucrative over the long term, though navigating the stock’s inherent fluctuations will require patience and resilience.
If you’re pondering whether to invest $1,000 in Nvidia now, consider this—some investment advisors have recently identified ten stocks primed for growth that do not include Nvidia. While Nvidia has a remarkable legacy, diversifying your portfolio with a mix of potential winners might unlock even greater returns. After all, investing should be strategic rather than reactionary.
Nvidia’s journey in the ever-evolving tech landscape positions it as a critical player in the ongoing AI revolution, but just as with all investments, you should remain vigilant to navigate the potential challenges that lie ahead. By balancing optimism with caution, investors can maximize their chances of success in this dynamic market.