Nvidia (NASDAQ:NVDA) has experienced a notable dip, hitting a six-week low and declining by over 16% since reaching a record high last month. However, Morgan Stanley believes that this decline represents “another buying opportunity,” expecting concerns about the sustainability of demand for Nvidia’s chips used in artificial intelligence (AI) computing to dissipate with management comments or financial results.
The rising valuation of Nvidia has raised eyebrows, especially as the stock has surged by more than 188% this year. Research Affiliates LLC has expressed doubts about Nvidia’s ability to live up to such high expectations given its lofty valuation. Cathie Wood of Ark Investment Management has also voiced concerns about Nvidia’s expensiveness, suggesting there may be better opportunities to tap into the growth of AI. ARK Innovation ETF reduced its Nvidia holdings in January, missing out on the subsequent stock rally.
Adding to the challenges, the Federal Reserve’s commitment to maintaining higher interest rates to combat inflation has led to a surge in bond yields, which has weighed heavily on technology stocks. Even with this pressure from higher interest rates, Nvidia has declined by more than 14% this month, while the Nasdaq 100 Stock Index ($IUXX) (QQQ) experienced a 5% decline.
Despite these headwinds, Nvidia’s valuation has fallen to 29 times projected profits for the next 12 months, the most affordable it has been in nearly a year. This marks a significant drop from its valuation in May, which was twice as expensive. According to Bloomberg data, Nvidia’s current valuation is also below its 10-year average of 32 times earnings. Furthermore, earnings estimates for Nvidia have seen a substantial increase recently, with the average analyst projection for earnings per share in Nvidia’s fiscal year 2025 tripling over the past six months.
Market concerns have arisen because Nvidia did not experience a substantial rally after surpassing Q2 sales estimates by over $2 billion in August, leading some to believe that the stock may have already priced in much of its future growth potential. However, analysts remain bullish on the stock, with the average price target for Nvidia reaching $646, implying a gain of over 50%. Grizzle Investment Management, a firm with Nvidia among its top holdings, believes that Nvidia is attractively priced considering the growth it is generating and that the demand for its products is genuine.
In conclusion, while Nvidia has faced challenges and experienced a recent downturn, some analysts and investors still see potential in the stock, especially as its valuation has become more reasonable and earnings estimates have surged. However, potential investors should carefully evaluate their risk tolerance and conduct thorough research before making investment decisions.
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