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Shares of Nvidia (NVDA) dropped to a 6-week low last Thursday and are down more than -16% since posting a record high last month. However, the slump in Nvidia’s share price has prompted Morgan Stanley to say the recent drop in the stock has created “another buying opportunity” as concerns about demand sustainability for the company’s chips used in artificial intelligence (AI) computing will soon be quelled by management comments or financial results.
Many analysts have become concerned about Nvidia’s high valuation as the stock has soared more than +188% this year. Research Affiliates LLC argues that Nvidia is priced so high that it can’t possibly live up to expectations. Also, Ark Investment Management’s Cathie Wood said Nvidia is too expensive, and there are better opportunities to tap into the exponential growth in AI. ARK Innovation ETF cut its holding in Nvidia in January and missed out on the stock’s surge this year.
With the Federal Reserve signaling its willingness to keep interest rates higher for longer to combat inflation, bond yields soared and weighed heavily on technology stocks, with the 10-year T-note yield climbing to a 16-year high. Even with the pressure of higher interest rates, Nvidia is down more than -14% this month compared to a -5% decline in the Nasdaq 100 Stock Index ($IUXX) (QQQ).
This month’s selloff in Nvidia, combined with rising profit estimates, has knocked its valuation down to 29 times profits projected over the next 12 months, the cheapest valuation in nearly a year. Nvidia’s valuation is now half as expensive as it was in May, before the first of its two consecutive blow-out earnings reports. According to Bloomberg data, Nvidia’s current valuation is also below its average of 32 times over the past ten years. Earnings estimates for Nvidia have surged recently as the average analyst projection for earnings per share in Nvidia’s fiscal 2025, which ends on January 31, 2025, has more than tripled in the past six months.
Market concerns have risen that Nvidia’s failure to rally after beating Q2 sales estimates by more than $2 billion in August is a sign that the stock has priced in most of its future growth prospects. However, analysts have only gotten more bullish on the stock, with the average price target for Nvidia rising to $646, implying a gain of more than 50%. Grizzle Investment Management, which counts Nvidia among its top holdings, said, “Nvidia is really reasonably priced for the growth it is generating. In a few years, you’ll look back and see it as very attractively priced right now. The demand isn’t a mirage.”
On the date of publication, Rich Asplund 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.
