Is It Time to Buy Nvidia on the Dip?

GPU giant NVIDIA Corporation (NASDAQ:NVDA) experienced a significant sell-off this month, and crashed around 10% on April 19 alone, rattling the market. Rumors are flying now that the AI market may be overhyped with leader Nvidia taking such a large tumble.

Undisputedly, NVIDIA has been the market darling, and for good reason. It is a stock with a market capitalization of over $2 trillion that has returned more than 90% over the past six months and 230% over the past twelve months.

Nevertheless, the double-digit percentage crash on a single day that followed a decline from close to $1,000 just a few weeks ago is symptomatic that sentiment has shifted and traders may be running for the exits.

Should You Be Concerned About NVIDIA?

The recent pullback does undoubtedly look concerning. Lofty gains followed by a sharp pullback has all the hallmarks of a share price bubble that formed and is now popping.

The narrative that drove share price gains had been compelling. NVIDIA’s chip empire was built on the massive demand for Graphic Processing Units (GPUs) (parallel processing units that can charge supercomputers), which also extend to AI applications.

Generative AI’s large language models, such as ChatGPT which have taken the world by storm since their release, have been trained on thousands of NVIDIA GPUs, propelling the company’s popularity as an AI investment. So, it’s no surprise that headwinds in the AI space reflect poorly on the share price performance.

Although price normalization is to be expected, Nvidia may not realize its full potential for years to come. Meanwhile the technology has had widespread proliferation and impact. According to the Nielsen Norman Group, Generative AI improved users’ performance by 66% across three case studies, and as per Mckinsey, its economic impact is forecast to be between $2.6 and $4.4 trillion annually.

One point of worry though stems from the company’s Chinese operations. Tensions are rising between the U.S. and China, resulting in a series of export controls for chip companies. However, chip giants like NVIDIA have strived to cater to the Chinese market by designing modified chips. NVIDIA stated that its competitive position has been harmed by such restrictions.

There is also a lot of competition in the chip market. Industry giants like Intel Corporation (NASDAQ:INTC) and Advanced Micro Devices, Inc. (NASDAQ:AMD) are hot on the heels of NVIDIA. Plus, a lot of smaller chip companies are also venturing into AI operations.

Stunning Financials Wow Investors

The company’s financials have been nothing short of scintillating recently. Quarterly top line growth in particular has stunned investors.

From Q1 2023 to Q4 2024, revenues almost tripled. This can be seen as a direct consequence of the growth in its quarterly data center revenues, the segment primarily connected to its AI operations which grew about fivefold over the same period.

It must also be noted that in the last reported quarter (Q4 FY2024, ended January 28), NVIDIA’s revenue reached $22.10 billion, reflecting a stunning growth of 265% from the prior-year quarter.

Bottom line financials have also had a huge turnaround compared to the prior yearly period. Non-GAAP gross margin was up by 10.6% to 76.7%, while non-GAAP net income improved by 491% year-over-year to stand at $12.84 billion.

This looks good when we consider that fiscal 2023 was not that conducive to the company. FY2023 revenue was flat compared to its year-ago value, and the bottom line was down from the prior year. NVIDIA had incurred additional in-office costs and costs related to the termination of its Arm acquisition amounting to $1.35 billion.

As of now, the company’s solid turnaround shows that demand has not subdued for chips. NVIDIA stated the same, underscoring the Hopper architecture products. Looking ahead, the company is expecting a more aggressive push into AI,  notably the ramping of its H200 chips.

Last month, the NVIDIA Blackwell platform was launched. This particular platform’s GPU architecture offers six technologies that support accelerated computing and many industry opportunities. The chips are expected to be adopted by big tech names like Amazon Web Services, Google, Meta, Microsoft, and OpenAI.

Should You Buy NVIDIA on Its Dip?

If analysts consensus view is correct, Nvidia is a great stock to buy on the dip because the average price target is 29.7% higher at $992.48 per share.

Analysts also predict very strong sales growth this year in addition to strong cash flows that all support a bullish investment thesis.

With high profitability and a roaring sharing price the multiples have become stretched but it’s likely that Nvidia will bounce back at some stage and recover to eclipse former highs.

No observable slowdown in AI is apparent at this time fundamentally, even if the share price has taken a tumble. Indeed, NVIDIA’s fundamentals look rock-solid, which gives the company the leeway to venture aggressively into more AI-related chip designs.

Why the sell-off, then? Well, Wall Street darlings are not impervious to volatility, and neither is NVIDIA. Broader market blues are likely spreading and sparking the recent dip.

Consumer prices are still quite high, and the Fed is not ready to cut rates anytime soon, which has created an uncertain atmosphere.

NVIDIA’s forward non-GAAP PEG sits quite nicely at just 1.01, which makes sense when we consider the fact that its EPS is expected to grow at a 35.1% CAGR over the next 3-5 years. Furthermore, analysts still expect the stock to grow by 11.4%, dashing concerns of a steeper sell-off.

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