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Down 15% From Highs, What's Next for Nvidia Stock?

Barchart - Wed Sep 27, 8:35AM CDT

After a blistering rally since the start of this year, Nvidia (NVDA) stock has pulled back sharply this month. The stock has declined by 15% so far in September, pressured by a combination of profit-taking, valuation concerns, the Federal Reserve's hawkish monetary policy, sustained high inflation, and speculation regarding weakening demand.

While Nvidia stock has given up some of its year-to-date gains, investors need to recognize that stock prices fluctuate in both upward and downward directions. Moreover, these fluctuations do not alter Nvidia's long-term prospects.  

Nvidia, with its accelerated computing platform and graphics processing units (GPUs), stands out as the leading stock in the artificial intelligence (AI) space. Further, the massive ramp-up in AI adoption and its implementation will likely fuel a fresh upswing in Nvidia stock by bolstering its revenue and cash flows and enabling the company to enhance its shareholders’ value. 

Although I believe that investors should exercise prudence before investing in stocks - and focus on buying equities with fair valuations - Nvidia, as it leads the charge in the AI revolution, has significant room for additional growth. This suggests that the recent drop in its share price presents a compelling buying opportunity. 

Let's delve into the factors that support this bullish outlook.  

AI Leadership 

Nvidia is at the forefront of the AI revolution, with its GPUs finding widespread use in AI applications. The company's HGX platform is also recognized as the powerhouse behind generative AI and large language models, driving massive demand for its AI platform.  

Thanks to its AI leadership, there's a significant surge in demand for Nvidia's accelerated computing and AI solutions, as enterprises race to develop and deploy AI strategies. To underscore the significance of this robust demand, it's worth noting that the company achieved revenue of $13.51 billion in the second quarter (Q2), representing a remarkable 88% sequential growth and an impressive 101% year-over-year increase. This was primarily led by stellar growth in the Data Center segment. 

Looking ahead, the momentum in Nvidia’s business will likely continue, driven by persistent demand for its accelerated computing and AI platforms. Major cloud service providers are upgrading their data center infrastructures, ensuring sustained high demand. Furthermore, large consumer internet companies are actively investing in AI-specific data center infrastructure, further bolstering its growth prospects.

As the strong demand persists, and Nvidia continues enhancing its GPU architecture with AI-specific capabilities, the company should solidify its dominant position. Further, the chip designer remains upbeat and expects supply to increase each quarter through next year, which is positive. 

Gaming Offers Significant Upgrade Opportunities

Besides the strength in its Data Center segment, the resurgence of growth in the Gaming division is poised to bolster its financials and stock price. The company’s management highlighted that its next-generation graphics and AI offerings present a significant upgrade opportunity ahead. 

During Nvidia's Q2 conference call, CFO Colette Kress said, “Just 47% of our installed base have upgraded to RTX and [only] about 20% have a GPU with an RTX 3060 or higher performance.” This implies that the gaming segment has a strong runway ahead as the adoption of NVIDIA RTX technology continues to expand.  

Beyond Data Center and Gaming

Beyond cloud service providers and large internet companies, many enterprises and startups spanning various sectors are adopting Nvidia's GPUs to infuse automation into their products and services. 

In particular, the transportation sector is embracing Nvidia’s platform to power autonomous driving initiatives, while the healthcare industry is leveraging Nvidia’s products to advance medical imaging and drug discovery. Additionally, the financial services sector is utilizing Nvidia's tech to develop fraud detection systems. 

Furthermore, professional designers also use Nvidia’s GPUs to craft captivating visual effects and shape the design of structures and products, ranging from smartphones to commercial aircraft.  

Bottom Line

Overall, Nvidia will play a pivotal role in shaping the future of accelerated computing and AI. The massive demand for its AI platform, focus on strengthening its dominance with new AI features, and improving supply chain all bode well for growth.  

While the macroeconomic headwinds could keep Nvidia stock volatile, the long-term prospects remain bright. This is demonstrated in analysts’ recommendations for Nvidia stock, as 31 out of the 35 analysts covering NVDA have rated it a “Strong Buy.” Three analysts have a “Moderate Buy” rating, while one maintains a “Hold.”  

The average 12-month price target for Nvidia stock is $625.68, implying expected upside of about 49% from current levels.

On the date of publication, Sneha Nahata did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.