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Nvidia: Down 10% From Last Week's High, is Now a Good Time to Buy?

Barchart - Wed Jun 7, 5:53PM CDT

What AI assistants like Apple's (AAPL) Siri, Amazon's (AMZN) Alexa, and Alphabet's (GOOGL) Hey Google couldn’t do, ChatGPT did: it set the long overdue artificial intelligence (AI) trend in motion. Be it cracking some of the toughest exams or seeking stock recommendations, people are flocking to get answers from ChatGPT. And investors are pouncing on anything that says ‘generative AI’ because OpenAI (the company that developed ChatGPT) doesn’t trade on the stock exchange. So which stock have investors been flocking to ride ChatGPT frenzy? Nvidia (NVDA). 

Nvidia’s jump to trillion-dollar

On May 24, Nvidia released its fiscal 2024 first-quarter earnings, and the stock made a vertical jump of 24% in one day, entering the $1 trillion market cap. The stock jumped from $305 to over $419, exceeding its crypto bubble peak of $329.85 in November 2021. Even though Intel (INTC) stock jumped 14.7% and Advanced Micro Devices (AMD) 17.3%, they are nowhere close to their tech bubble peak. 

Behind Nvidia stock’s 24% jump was the company’s bullish revenue outlook of $11 billion in the second quarter, up 63% from $6.7 billion in Q2FY23. All this growth will be led by record demand for accelerated computing and generative AI. Nvidia’s CEO Jensen Huang, in the fiscal fourth-quarter earnings, said, “Our entire data center family of products — H100, Grace CPU, Grace Hopper Superchip, NVLink, Quantum 400 InfiniBand, and BlueField-3 DPU — is in production. We are significantly increasing our supply to meet surging demand for them.” 

These products are quite expensive. For instance, Nvidia H100 can sell for $40,000 on the secondary market. And Nvidia’s graphics processing units (GPUs) dominate the AI GPU space. While AMD and Intel also have data center GPUs, they are no match for Nvidia’s performance. Plus, Nvidia has a history of meeting and beating its earnings guidance. It means the outlook is something to be bullish on. 

Is Nvidia leading a tech bubble? 

A bubble is the result of a speculative frenzy where asset prices soar to unsustainable levels, only to be followed by a rapid and significant fall. This cycle is driven by market behavior that ignores the intrinsic value of the assets and trades them at prices far beyond what they are actually worth.

Year-to-date (YTD), NVDA is up more than 150%. This is significantly higher than any other large or mega-cap stocks performance YTD (the next highest being Meta Platforms (META) which is up 119%). DataTrek Research points out that without the gains in 2023 in Apple, Microsoft (MSFT) , Alphabet, and Nvdia, "the S&P 500 would be down 0.7 percent YTD without the snapback in US large cap Tech from deeply oversold conditions at the end of last year."

This sudden jump in tech stocks remotely related to generative AI has sparked a debate on Wall Street about a new tech bubble. 

In an interview on CNBC, Economist David Rosenberg said, “No question that we have a price bubble,” when discussing the moves in AI stocks. In a recent letter to clients Rosenberg said, ”“There are breadth measures for the S&P 500 that are the worst since 1999. Just seven mega-caps have accounted for 90% of this year’s price performance.” He continued,“You look at the tech weighting in the S&P 500 and it is up to 27%, where it was heading into 2000 as the dotcom bubble was peaking out and soon to roll over in spectacular fashion.”

However, economist Jeremy Siegel believes, “It’s not a bubble yet.” In regards to NVDA, he said that the company is a beneficiary of the AI boom, and was a "real, good company" with "blowout" earnings.

The long-term outlook for Nvidia

Let’s forget the short-term bump and look at the broader picture. Nvidia is the company that created GPUs, and these GPUs gave data centers the computing power to perform AI tasks. When no hardware company was talking AI, Nvidia was building use-case scenarios for GPU computing. It first rode the PC gaming rally, then the crypto rally, and now it is riding the data center rally. 

The AI data center is moving from retrieving data (in which central processing units (CPUs) excelled) to generating data using AI (in which Nvidia’s GPUs excel). A good example is Google’s A3 supercomputer which has eight Nvidia H100 GPUs for one high-end Intel Xeon CPU. That explains why Nvidia’s data center revenue surged 14%, while that of AMD was flat, and Intel’s fell 39% in the January to March 2023 quarter.

Generative AI is just one of the applications. Nvidia also has offerings in Omniverse like autonomous driving and smart city where AI will work at the edge to perform tasks, but that’s an opportunity biding its time. 

Long story short, global data centers are upgrading from general-purpose to accelerated computing as everyone, from enterprises to cloud companies, chase the AI dream. And Nvidia has a full stack of AI infrastructure with a supporting operating system ready to be sold. Nvidia, in its 2022 Investor Day presentation, estimated its AI ecosystem to have a $1 trillion addressable market, with data center and automotive each estimated to be a $300 billion market. 

Down 10% from all-time highs, is now a good time to scoop up NVDA? 

My opinion is that as good as NVDA look in the long-term, now is not a good time buy shares of the stock. The stock looks expensive, with a price-to-earnings ratio (P/E) of 195. I think that in the current economy, recessionary factors like rising interest rates and high inflation are drying up liquidity. Interest rates are unlikely to impact the expansion plans of large-cap tech stocks, but a recession could. 

Therefore, if you own NVDA already and looking at holding it for the long-term, I believe you can continue holding a core position, but now is a good time to book profits in some of your shares. And if you don't own Nvidia yet and are looking for a good entry point to scoop up some shares, my suggestion is to wait and watch, as a correction is likely. 

On the date of publication, Puja Tayal 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.